Hilton Food Group
Annual Report 2013

Plain-text annual report

The specialist international retail meat packing business Annual report and financial statements 2013 H i l t o n F o o d G r o u p p l c A n n u a l r e p o r t a n d fi n a n c i a l s t a t e m e n t s 2 0 1 3 Hilton Food Group plc Annual report and financial statements 2013 Business overview Hilton Food Group plc, the specialist retail meat packing business supplying major international food retailers in 13 European countries and Australia, announces its results for the 52 weeks ended 29 December 2013. In 2013 Hilton made excellent progress in terms of implementing its future growth strategy, including the further development of our Australian joint venture and the new UK contract with Tesco. The Group has maintained a high level of investment in its meat packing facilities across Europe whilst realising the available opportunities to progressively and profitably expand its business. The strategic progress made during 2013 illustrates well the continued relevance and international transferability of Hilton’s business model. 2013 performance highlights Revenue (£m) £1,124.8m +9.1% 2012: £1,031.0m Operating profit (£m) £25.8m –0.7% 2012: £26.0m Closing net cash/(debt) (£m) £4.9m 2012: £(5.2)m 981.3 1,031.0 1,124.8 826.1 864.2 2009 2010 2011 2012 2013 25.9 26.0 25.8 23.3 21.7 2009 2010 2011 2012 2013 4.9 2009 2010 2011 2012 2013 (5.2) (18.0) (18.7) (20.6) Overview 2013 performance highlights Where we operate Strategic report Chairman’s introduction Chief Executive’s summary Our business model Our strategy and objectives Our widening geographical coverage Our people Business development in 2013 Past and anticipated future trends Current trading and outlook Performance and financial review 2013 financial review Key performance indicators Treasury management Going concern and forward looking statements Risk management and principal risks Corporate and social responsibility report Approval of Strategic report Governance Board of Directors Directors’ report Corporate governance statement Report of the Audit Committee Report of the Nomination Committee Report of the Risk Management Committee Directors’ remuneration report Directors’ remuneration policy Annual report on remuneration Statements of Directors’ responsibilities Independent auditors’ report Financial statements Consolidated income statement Consolidated statement of comprehensive income Consolidated balance sheet Consolidated statement of changes in equity Consolidated cash flow statement Notes to the financial statements Registered office and advisors 1 1 4 8 10 10 11 12 12 13 15 15 16 16 18 20 21 22 25 29 32 34 36 39 41 42 43 44 49 53 54 60 60 61 62 63 64 85 Financial statementsGovernance OverviewStrategic report2 2013 performance highlights continued Strategic highlights The joint venture with Woolworths Limited in Australia announced in January 2013 is performing well and in line with expectations. The conversion of the Bunbury site in Western Australia, to increase retail packed meat production, is substantially complete. In August 2013 Woolworths announced the construction of a new dedicated retail packed meat facility, near Melbourne in Victoria, due to commence production in 2015, which will be operated by our joint venture company. In early December 2013 we announced a five year long term supply agreement with Tesco which is expected, on a progressive basis, to substantially increase Hilton’s UK volumes. Hilton Food Group plcAnnual report and financial statements 20133 Operational and financial highlights Revenue growth of 9.1%, with increases in the UK, Denmark and Holland (the latter accelerated by new product launches). Revenue benefited in 2013 from the recovery of higher meat prices and favourable movements in exchange translation. Volume growth of 2.0%, with new product lines introduced in Holland and continued growth in Denmark offset by continuing pressures on consumer spending, particularly in Ireland and Central Europe. Operating profit of £25.8m only marginally below the previous year’s level (2012: £26.0m) after bearing start-up costs of £1.4m in Australia. Free cash flow of £17.0m, despite a higher level of investment in equipment and facilities, moving the Group into a net cash position at the year end. A strong balance sheet with no gearing and interest cover at 29 times underpinning both future expansion and a progressive dividend policy. Financial statementsGovernance OverviewStrategic reportHilton Food Group plcAnnual report and financial statements 20134 Where we operate Denmark Location: Aarhus Customer: Coop Danmark Commenced production: 2011 Ireland Location: Drogheda Customer: Tesco Ireland Commenced production: 2004 United Kingdom Location: Huntingdon Customer: Tesco UK Commenced production: 1994 Netherlands Location: Zaandam Customer: Albert Heijn Commenced production: 2000 Hilton Food Group plcAnnual report and financial statements 20135 Australia Location: Bunbury Customer: Woolworths Commenced joint venture: 2013 Sweden Location: Vasteras Customer: ICA Commenced production: 2004 Central Europe Location: Tychy, Poland Customers: Ahold Central Europe Rimi Baltics Tesco Central Europe Commenced production: 2006 Melbourne Under construction Financial statementsGovernance OverviewStrategic reportHilton Food Group plcAnnual report and financial statements 20136 Hilton Food Group plcAnnual report and financial statements 20137 Strategic report Chairman’s introduction Chief Executive’s summary Our business model Our strategy and objectives Our widening geographical coverage Our people Business development in 2013 Past and anticipated future trends Current trading and outlook Performance and financial review 2013 financial review Key performance indicators Treasury management Going concern and forward looking statements Risk management and principal risks Corporate and social responsibility report Approval of Strategic report 8 10 10 11 12 12 13 15 15 16 16 18 20 21 22 25 29 Financial statementsGovernance OverviewStrategic reportHilton Food Group plcAnnual report and financial statements 20138 Chairman’s introduction Annual report format Our Annual report this year comprises three parts, a Strategic report followed by a Governance section and the Financial statements. The Strategic report includes detail on our business model, our strategy and objectives, our widening geographical scope, our people, the development of our businesses in 2013 and our current view on some past and potential future trends. This is in addition to the normal financial analysis of our trading during 2013 and our position at the end of that year, consideration of our risk management strategy and our corporate social responsibility report. Strategic progress achieved in 2013 The Group made excellent strategic progress during the year. In January 2013 we announced a joint venture with Woolworths in Australia. The joint venture’s initial task was the conversion of Woolworths’ meat processing facility at Bunbury, in order to substantially increase production of retail packed product lines. This has been executed to plan, with the new product lines being well received by the local market. In August 2013 Woolworths announced that it would proceed with plans to construct a new meat processing facility near Melbourne in Victoria which would be operated by our joint venture company, with production currently targeted to commence in 2015. This marks a significant milestone in the further development of our joint venture. In early December 2013 we announced a five year long term supply agreement with Tesco for the UK, under which the volumes supplied by Hilton are planned to increase substantially over the course of 2014. Board composition The Board is responsible for the longer term success of the Group and to achieve this it contains an appropriate mix of skills and depth of practical business experience, which is available to support and guide our management teams across a progressively widening range of countries. There have been no changes in Board membership during 2013 and I would like to take this opportunity to thank my colleagues on the Board for their continued sound counsel, expertise and support. Group performance and dividend policy Volume growth was achieved during 2013, in the face of continued pressure on consumer spending across Europe, which was particularly marked in Ireland and Central Europe. Despite the start-up costs incurred in connection with the new Australian joint venture, profit progress was achieved in 2013 at the post tax level. The Group’s net income in 2013 at £17.8m was 1.4% higher than in 2012 (£17.6m) with earnings per share at 25.0p slightly ahead (2012: 24.9p). Hilton has continued to generate significant free cash flow having reduced its net debt level in every year since its flotation in 2007. In 2013 the Group moved into a net cash position by the end of the financial year. During 2014 material capital expenditure will be incurred at the Group’s United Kingdom facilities in Huntingdon which will enable the planned UK volume increases for Tesco. This will include investment in a further production unit. Substantial capital expenditure will also be incurred during 2014 at Vasteras in Sweden to replace production lines at the end of their economic life with state of the art equipment; this will achieve higher line speeds and reduced manning requirements, designed to achieve reduced unit packing costs. Hilton Food Group plcAnnual report and financial statements 20139 The Group has maintained a progressive dividend policy since flotation, which remains appropriate given both the strategic progress achieved in 2013 and Hilton’s continuing level of cash generation. The 5.8% increase proposed in the final dividend for 2013 will increase the total dividends paid in respect of 2013 by 6.3%, as compared to last year. Annual General Meeting This year’s AGM will be held at the Old Bridge Hotel, 1 High Street, Huntingdon, Cambridgeshire PE29 3TQ on 14 May 2014 at noon and I look forward to seeing you there. Sir David Naish dl Non-Executive Chairman 26 March 2014 Financial statementsGovernance OverviewStrategic reportHilton Food Group plcAnnual report and financial statements 201310 Chief Executive’s summary Our business model Our business model is relatively straightforward. We operate large scale, highly mechanised, extensively automated meat processing and packing facilities for major international multiple retailers on a dedicated basis. The one exception is in Central Europe, where our facility in Poland supplies three retailers in order to achieve critical mass, in terms of volumes supplied and the ability to achieve competitive unit packing costs. Raw material meat is sourced, in conjunction with our retail partners, from a wide and growing international base of proven suppliers paying due regard to our partners preferences. It is then processed, packed and delivered to the retailer’s distribution centres. Our plants are highly automated and use advanced robotics for the storage of raw materials and finished products. This developing technology has been extended both in the production environment and to the sorting of finished products by retailer store order, achieving material supply chain efficiencies for our customers. In Europe we have six facilities each run by a local management team. These operate under the terms of five to ten year long term supply agreements with our retail partners, either on a cost plus or agreed packing rate basis. This maximises the volume throughput whilst minimising unit packing costs. In Australia our joint venture company receives a volume related management fee in respect of the facilities it operates on behalf of Woolworths. We are a very committed and loyal partner with a continuing record of delivering value through quality products with the highest levels of food safety, traceability and integrity, whilst providing a range of services which enable our customers to evolve and improve their meat supply chain management. Our customer base comprises high quality multiple retailers and our in depth understanding of our customers’ needs, together with those of their consumers, enables us to play an active role in managing their meat supply chains providing agile responses to supply chain challenges as they arise from time to time. As our customers’ markets change and competition increases, we need to focus on the challenges they face and be able to advance flexible solutions, together with continuing increases in efficiency and cost competitiveness. To ensure our continued competitiveness, we seek to keep ourselves at the forefront of the meat packing industry. We constantly seek to drive further efficiencies and our modern, very well invested facilities are considered a key factor in keeping unit packing costs as low as possible. Over the decade to December 2013, we have invested continuously, across all areas of our business, from the sourcing of raw materials, the design of packaging materials, increased efficiency in processing and storage solutions and updating our IT infrastructure. Capital expenditure over this period has totalled over £165m. This investment, combined with continuing volume growth, has allowed us to partly offset inflationary pressures, including the progressive rise seen over recent years in raw material meat prices. Hilton Food Group plcAnnual report and financial statements 201311 We will continue to pursue measured and well thought out geographical expansion, whilst actively developing, enriching and expanding the scope of our existing business partnerships, playing a full and proactive role in strongly supporting our customers and the successful development of their businesses. The strength of our long term partnerships with our retail customers has been a key driver of our growth since the Group was formed and will continue to underpin the Group’s strategy. Hilton’s business model has proved successful across a range of European countries, appropriately adapted in each case by working in close collaboration with its local customers to meet their specific requirements. Our experience to date indicates that it can be transferred over time to a number of new countries, most recently in Australia. Our strategy and objectives Our strategy is to support our customers’ brands and their development in their local markets, whilst achieving attractive and sustainable rates of growth and returns for our shareholders. This single minded and straightforward approach has generated continuous growth over an extended period and, with a growing reputation, well invested facilities and a strong balance sheet, the Group remains well placed to achieve further progress. Hilton builds long term customer and shareholder value by focusing on: – Growing volumes and extending product ranges supplied and services provided to existing customers; – Maintaining an uncompromising focus on food safety and integrity and reducing unit costs while improving product quality and service provision; and – Entering new territories either with new customers or in partnership with our existing customers. Financial statementsGovernance OverviewStrategic reportHilton Food Group plcAnnual report and financial statements 201312 Chief Executive’s summary continued Our widening geographical coverage The Group’s past expansion has been based on its established track record, together with its growing international reputation and experience and the recognised success of the close partnerships it has forged and maintained with its successful retail partners. The six European countries in which the Group currently operates, with the dates operations commenced in each country are set out below: The joint venture with Woolworths in Australia, announced in January 2013, involves the joint venture company managing Woolworths’ meat processing and packing facilities at Bunbury in Western Australia and Brismeats in Eastern Australia and from 2015 a green field state of the art meat packing facility near Melbourne, in Victoria. Year Country Location 1994 UK 2000 2004 2004 2006 Holland Ireland Sweden Central Europe Huntingdon Zaandam Drogheda Vasteras Tychy, Poland Customers Tesco UK Albert Heijn Tesco Ireland ICA Ahold Central Europe, Tesco Central Europe and Rimi Baltics 2011 Denmark Aarhus Coop Danmark We believe that successful businesses are about having the right people in the right positions working together as “one team”, with local management teams empowered, encouraged and advised in specialist areas to enable them to support their local customers. We are committed to providing an inclusive working environment where everyone feels valued and respected and where people from different backgrounds, experiences and abilities can bring benefits to our business. In 2013 72% of the Group’s turnover was earned in countries outside the United Kingdom, together with 78% of the volumes of meat delivered. This widening geographical spread makes the Group increasingly resilient and minimises its dependence on the fortunes of any one individual economy. Our people The Group currently employs over 2,300 employees, in six European countries. Our business model is decentralised, with capable, largely self-sufficient management teams running our businesses in each country. We consider this structure to be essential, as it achieves very close working relationships with our customers, who benefit from dedicated, flexible and rapid local support. Hilton Food Group plcAnnual report and financial statements 201313 Directors Senior managers Employees Male Female 52 1,494 7 12 825 We fully recognise the benefits of gender diversity. At the end of 2013 the number of male and female Directors of the parent company, senior managers and overall workforce were as above. Our workforces are in many cases ethnically diverse. Rates of pay are set to recruit and maintain high quality workforces at each location. Business development in 2013 Our business comprises three distinct operating segments: Western Europe Operating profit of £27.9m (2012: £27.7m) on turnover of £1,028.7m (2012: £935.4m) The Board fully understands and appreciates just how much our progress relies on the effort, personal commitment, enthusiasm, enterprise and initiative of our employees and I would like to take this opportunity, on behalf of the Board, to personally thank all of them both for their dedicated efforts during 2013 and continuing commitment to the Group’s ongoing growth and development. This operating segment covers the Group’s businesses in the UK, Ireland, Holland, Sweden and Denmark. Volume growth of 2.9% was achieved, with turnover growth of 10.0%. This reflected volume growth in Holland and Denmark, driven by new product lines and expanded meat packing capacity respectively. Volumes in Ireland were reduced with consumer spending remaining under continuing pressure. Turnover growth benefitted from the recovery of higher raw material meat prices and favourable movements in exchange translation. Financial statementsGovernance OverviewStrategic reportHilton Food Group plcAnnual report and financial statements 201314 Chief Executive’s summary continued The robotic store order picking facility for Coop Danmark which handles, in addition to our own production, a range of third party Coop products such as poultry, has built volumes in line with our expectations. Services such as this, which enable us to manage the meat supply chain more efficiently from raw material procurement to store delivery, represent an important addition to our supply chain optimisation offering. A facility of this type will be incorporated in the new Melbourne meat packing facility for Woolworths due to commence production in 2015. Central Europe Operating profit of £2.5m (2012: £2.3m) on turnover of £96.1m (2012: £95.6m) In Central Europe the Group’s meat packing business, based at Tychy in Poland, supplies three customer groups across Central Europe, from Hungary to the Baltics. In 2013 this multi- customer business supplied Ahold stores in Czech Republic and Slovakia, Tesco stores in Hungary, Czech Republic, Poland and Slovakia and Rimi stores in Latvia, Lithuania and Estonia. In very competitive market conditions volumes declined by 2.5% in 2013, but reflecting the recovery of higher raw material meat prices and favourable exchange rate movements, turnover increased marginally, by 0.5%. The resumption of volume growth combined with a rigorous focus on cost control remain the keys to achieving the very low levels of unit packing costs required for our customers to be able to compete strongly and grow in these very competitive developing markets. Central costs and other Net operating cost £4.6m (2012: £4.0m) This segment includes the income from our joint venture with Woolworths of £0.5m (2012: £nil), the start-up costs in connection with that joint venture of £1.4m (2012: £nil) and central costs of £3.7m (2012: £4.0m). In Australia the Group is involved in a joint venture with Woolworths, under which it earns a fifty per cent share of the agreed fees charged by the joint venture company for operating certain Woolworths’ meat processing and packing plants, based on the volume of retail packed meat delivered to Woolworths’ stores. In May 2013 the joint venture company took over responsibility for the operation of Woolworths’ Western Australian meat processing centre in Bunbury, near Perth. The conversion of this facility to enable a substantial increase in retail packed meat production has been largely completed. Approximately £0.5m of the start-up costs related to the Bunbury redevelopment. In August 2013 the building of a purpose built retail packing facility near Melbourne in Victoria was announced which will be operated by the joint venture company and is expected to commence production in 2015. Hilton Food Group plcAnnual report and financial statements 201315 Current trading and outlook Benefitting from the new contract with Tesco in the UK and the expansion of the activities of Hilton’s joint venture in Australia, Hilton’s medium term growth prospects are encouraging. The shorter term economic outlook in our European markets, however, remains relatively challenging, and 2014 is likely to feature both comparatively high prices for meat and muted consumer spending, despite an improving overall economic outlook in some countries. Turning to currency, over recent months Sterling has appreciated against a number of currencies in which the Group trades. If the relevant currency parities remain at similar levels this will serve to slightly lower the Group’s results reported in Sterling for 2014, as compared to the previous year. In the early months of 2014 Hilton’s operating performance has been in line with the Board’s expectations. The Group’s business model has proved resilient over past difficult trading conditions and, although a high level of start-up costs will be incurred in 2014 both in relation to the expansion of the Huntingdon site and the new facility being constructed near Melbourne, the Board expects to make further overall progress. Robert Watson obe Chief Executive Officer 26 March 2014 Past and anticipated future trends Hilton’s growth has been aided by the consumer trend in most countries towards convenience and one stop shopping. As the larger general retail chains have gained a greater share of the grocery markets, they have increasingly turned to large scale, centralised meat packing plants capable of producing private label packed meat products more hygienically and cost effectively. In doing so, they have rationalised their supply base, achieving lower costs and higher food safety, food integrity, traceability and quality standards. This has allowed supermarket groups to focus on their core business and maximise their return on available retail space whilst addressing consumers’ requirement for value. Whilst grocery retail markets are expected to remain extremely competitive, with pressure on consumer expenditure and smaller format outlets gaining share, the trend towards increased use of centralised meat packing solutions is continuing at different speeds across the world. This gives rise to a wide range of potential future geographical expansion opportunities for Hilton, albeit in a range of different timescales. Within retail markets patterns are also changing, with increased internet based ordering and a parallel growth in the number of ‘click and collect’ facilities. Following pressures on consumer expenditure over a number of years there has been increased use by cost conscious consumers of local convenience stores, to shop more frequently for a reduced overall basket cost per visit. These developments will tend to reinforce the overall trend towards retail packed meat as this is the offering in all these growth areas, but they pose logistical challenges and opportunities, given the increasing need to be able to deliver smaller drop sizes on a cost efficient basis. Financial statementsGovernance OverviewStrategic reportHilton Food Group plcAnnual report and financial statements 201316 Performance and financial review 2013 financial review Hilton’s financial performance was sound in 2013, in what continued to be a relatively challenging economic environment across Europe. We increased our level of investment to support our customers, whilst strengthening our balance sheet and achieving a net cash position by the end of the year. This leaves the Group well placed to deliver future growth. This Performance and financial review covers the main highlights of the Group’s financial performance and position in 2013. Basis of preparation The Group is presenting its results for the 52 week period ended 29 December 2013, with comparative information for the 52 week period ended 30 December 2012. The financial statements of the Group are prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union (EU). 2013 financial performance Revenue Volumes grew overall by 2.0% with strong volume increases in Holland and Denmark offset by volume reductions in Ireland and Central Europe in difficult trading conditions. Further details of volume growth by business segment are set out in the Chief Executive’s summary. Revenue rose by 9.1% to £1,124.8m, as compared to £1,031.0m in 2012, reflecting both the recovery of higher raw material meat prices and favourable exchange rate movements. Operating profit and margin Operating profit, at £25.8m which includes Australian start-up costs of £1.4m, was marginally below the previous year’s level (2012: £26.0m). The operating profit margin in 2013 was 2.3%, as compared with 2.5% in 2012, reflecting both the Australian start-up costs and the impact of higher raw material meat prices, which were recovered in higher selling prices, but do not under all Hilton’s pricing arrangements give rise to a corresponding margin increase. Operating profit per kilogram of packed meat sold was 11.5p (11.8p in 2012). Net finance costs Net finance costs, at £0.9m were 28% below the previous year’s level (2012: £1.3m). Interest rates paid have remained at historically low levels, reflecting continuing low LIBOR and EURIBOR rates, which determine the interest rates on the Group’s principal borrowings. Interest costs have reduced with the shrinking net debt levels. Interest cover in 2013 increased to 29 times, as compared with 21 times in 2012. Taxation The taxation charge for the period was £5.5m (2012: £5.8m). This represented an effective taxation rate of 22.2% (2012: 23.5%) reflecting lower corporate tax rates. Profit for the year Profit for the year, at £19.4m, (2012: £18.9m) was higher than last year reflecting the reduced finance and taxation costs, which more than offset the slight reduction in operating profit. Hilton Food Group plcAnnual report and financial statements 201317 Dividends The Board aims to maintain a dividend policy that provides a dividend level that grows broadly in line with the underlying earnings of the Group and has recommended a final dividend of 9.1p per ordinary share in respect of 2013. This, together with the interim dividend of 3.65p per ordinary share paid in December 2013, represents a 6.3% increase in the full year dividend, as compared with last year. The final dividend, if approved by shareholders, will be paid on 27 June 2014 to shareholders on the register on 30 May 2014 and the shares will be ex- dividend on 28 May 2014. Earnings per share Basic earnings per share at 25.0p (2012: 24.9p) were slightly ahead of last year, with a 1.4% increase in the level of net income being offset by the dilutive effect of an increased number of shares in issue, following the exercise of executive and all employee share options. Diluted earnings per share were 24.8p (2012: 24.7p). Free cash flow and net borrowing levels Cash flow remained strong in 2013, with the Group generating £17.0m of free cash flow before dividends and financing, after net capital expenditure of £18.4m. Group borrowings were £29.7m at the end of 2013 and, with net cash balances of £34.6m, this resulted in a closing net cash position of £4.9m, as compared with the net debt level of £5.2m at the end of 2012. At the end of 2013 the Group had undrawn overdraft facilities of £18.3m (2012: £18.2m). With a net cash position, the Group had no gearing at the end of 2013 and this strong financial position gives the Group considerable flexibility viewed in terms both of potential future expansion and required reinvestments such as those in the UK and Sweden in 2014. In February 2014 the Group negotiated new and increased five year borrowing facilities with its principal bankers. Financial statementsGovernance OverviewStrategic reportHilton Food Group plcAnnual report and financial statements 201318 Performance and financial review continued Key performance indicators How we measure our performance against our strategic objectives The Board monitors a range of financial and non-financial key performance indicators ‘KPIs’ to measure the Group’s performance over time in building shareholder value and achieving the Group’s strategic objectives. The nine principal ‘KPIs’ used by the Board for this purpose, together with our performance over the last two years, is set out below: Financial KPIs Revenue growth (%) 9.1% 2012: 5.1% Operating profit margin (% turnover) 2.3% 2012: 2.5% Operating profit margin (pence per kg) 11.5p/kg 2012: 11.8p/kg Earnings before interest, taxation, depreciation and amortisation (EBITDA) (£’m) £41.3m 2012: £40.4m Free cash flow before minorities (£’m) £17.0m 2012: £20.5m Gearing ratio n/a 2012: 0.1 Definition, method of calculation and analysis Year on year revenue growth expressed as a percentage. The 2013 increase reflected principally the impact of favourable exchange translation rates and the recovery of higher raw material prices, with overall volumes 2.0% higher. Operating profit expressed as a percentage of turnover. The reduction in 2013 reflected the start-up costs incurred in connection with the new Australian joint venture and the higher level of raw material meat prices which, whilst recovered in higher selling prices, do not in all Hilton’s contractual arrangements feed directly through to correspondingly increased margins. Operating profit per kilogram sold. The reduction reflects the reduced operating profit margin. Operating profit before depreciation, amortisation and government capital grants. The increase reflects higher depreciation and amortisation resulting from higher capital expenditure. Cash flow before dividends and financing after £18.4m of net capital expenditure in 2013, compared with £12.1m in 2012. Year-end net debt divided by EBITDA. The Group was ungeared at the end of 2013, with a net cash position. Hilton Food Group plcAnnual report and financial statements 201319 Non-financial KPIs Growth in volume of packed meat sales (%) 2.0% 2012: 4.8% Employee and labour costs (pence per kilogram) 40.1p/kg 2012: 36.5p/kg Customer service level (%) 98.3% 2012: 98.8% Definition, method of calculation and analysis Year on year volume growth, expressed as a percentage. During 2013 volumes grew in Holland and Denmark. The increase reflects the impact of adverse movements in exchange translation rates with the balance coming from an increased level of complex products in the range. Packs of meat delivered as a percentage of the orders placed. Little year on year change, with high service levels being maintained. Financial statementsGovernance OverviewStrategic reportHilton Food Group plcAnnual report and financial statements 201320 Performance and financial review continued Treasury management Hilton does not engage in speculative trading in financial instruments and transacts only in relation to its underlying business requirements. The Group’s policy is designed to ensure adequate financial resources are made available as required for the continuing development and growth of its business, whilst taking practical steps to reduce exposures to foreign exchange, interest rate fluctuation, credit, pricing and liquidity risks, as described below: Interest rate fluctuation risk This risk stems from the fact that the interest rates on the Group’s borrowings are variable, being at set margins over LIBOR for Sterling borrowings or EURIBOR for Euro borrowings, which both fluctuate over time. The Board’s policy is to have an interest rate cap on a proportion of this borrowing. The Board will review hedging costs and options should the current low interest rate environment change materially. Customer credit and pricing risks As Hilton’s customers comprise a small number of very successful and credit worthy major multiple retailers, the level of credit risk is considered to be insignificant. Historically the incidence of bad debts has been immaterial. Hilton’s pricing is based predominately either on cost plus agreements or agreed packing rates with its customers. Liquidity risk Over recent years this has for many businesses represented a significant area of concern, given the continuing difficult and uncertain economic environment and liquidity constraints across banking systems in Europe. The Group remains strongly cash generative, has a robust balance sheet and has committed banking facilities for the medium term, sufficient to support its existing business. All bank positions are monitored on a daily basis and capital expenditure above set levels, together with decisions on intra group dividends, are all approved at Board meetings. All long term debt is arranged centrally and is subject to Board approval. Foreign exchange rate movements and country specific risks Whilst the presentational currency of the Group is Sterling, the majority of its revenues are earned in other currencies, currently principally the Euro, Swedish Krona and Danish Krone. The earnings of the Group’s overseas subsidiaries are translated into Sterling at the average exchange rates for the year and their assets and liabilities at the year- end closing rates. Changes in relevant currency parities are monitored on a continuing basis, with the timing of the repatriation of overseas profits and the repayment of any intra group loans to UK holding companies paying due regard to actual and forecast exchange rate movements. The Group has to date decided not to hedge its foreign exchange rate exposures, the impact of which has been broadly favourable overall over recent years, but this policy is kept under continuing review and will be reappraised as the Group’s geographic spread continues to widen. The Group’s overseas subsidiaries all have natural hedges in place as they, for the most part, buy raw materials, employ people, source services, sell products and arrange funding in their local currencies. As a result the Group’s exposure is in the main limited to its equity investment in each overseas subsidiary. The level of country specific risk currently remains material for many businesses, in terms of the impact of macroeconomic developments, including the impact of austerity programmes with countries still facing difficulties with their levels of national debt. The Group sells high quality basic food products, for which there will always be continuing demand, to successful blue chip multiple retailers in developed countries. Hilton has not to date been materially adversely affected by the extended recessionary environments seen in some countries, but will keep any future identified country specific risks under continuing review. Hilton Food Group plcAnnual report and financial statements 201321 Going concern and forward looking statements Going concern basis The Group’s bank borrowings are detailed in the financial statements and its new banking facilities, which support the Group’s existing and contracted new business, are committed, with no renewal required for five years. The Group is in full compliance with all its banking covenants. Future geographical expansion which is not yet contracted, and which is not built into internal budgets and forecasts, may require additional or extended banking facilities and such future geographical expansion will depend on our ability to negotiate appropriate additional or extended facilities, as and when required. Forward looking statements This Strategic report contains forward looking statements that are inevitably subject to risk factors associated with, amongst other things, economic, political and business developments which may occur from time to time across the countries in which the Group operates. It is believed that the expectations reflected in these statements are reasonable, but all forward looking statements and forecasts are inherently predictive, speculative and involve risk and uncertainty, simply because they relate to events and depend on circumstances that will occur in the future. Nigel Majewski Finance Director 26 March 2014 The Group’s internal budgets and forecasts, which incorporate all reasonably foreseeable changes in trading performance, are regularly reviewed in detail by the Board and show that it will be able to operate within its current banking facilities, taking into account available cash balances, for the foreseeable future. The Group also considered the effects of the principal risks and the impact of these on the going concern assessment. The going concern basis is, accordingly, adopted by the Board in preparing the financial statements. Financial statementsGovernance OverviewStrategic reportHilton Food Group plcAnnual report and financial statements 201322 Risk management and principal risks How we manage risk As with all businesses, the Group is exposed to a range of risks and uncertainties which could have a significant impact on its business, reputation, operating results and financial position. The Board believes a successful risk management framework carefully balances risk and reward, and applies reasoned judgement and consideration of potential likelihood and impact in determining its principal risks. The Group has a well-developed structure and range of processes for identifying, assessing, prioritising and mitigating these key risks. Significant risks facing the Group The six most significant identified business risks the Group faces, which, as might be expected with a straightforward business model, are unchanged from previous years and which will continue to affect the Group’s businesses, together with the measures we have adopted to mitigate these risks, are outlined in the table below. This is not intended to constitute an exhaustive analysis of all risks faced by the Group, but rather to highlight those which are the most significant, when viewed from the standpoint of the Group as a whole. Risk description Potential impact Risk mitigation strategies The Group is dependent on a small number of customers who can exercise significant buying power and influence. The Group has a relatively narrow, but expanding, customer base, with sales to subsidiary or associated companies of the Tesco and Ahold groups still comprising the larger part of Hilton’s revenue in 2013. The large retail chains are continuing to increase their market share of meat products in many countries, as retail customers continue to move away from high street butchers towards one stop convenience shopping in supermarkets. This increases the buying power of the Group’s customers which in turn increases their negotiating power with the Group, which could enable them to seek better terms over time. The Group is progressively widening its customer base and its maintained high level of investment in state of the art facilities, which together with management’s continuous focus on reducing costs, allow it to operate very efficiently at very high throughputs and price its products competitively. Hilton operates a decentralised, entrepreneurial business structure, which enables it to work very closely, nimbly and flexibly with its retail partner in each country, to achieve high service levels in terms of orders delivered, delivery times, compliance with product specifications and accuracy of documentation, all backed by an uncompromising focus on food safety, product integrity and traceability assurance. Hilton has long term supply agreements in place with its major customers, with pricing either on a cost plus or agreed packing rate basis. Hilton Food Group plcAnnual report and financial statements 201323 Risk description Potential impact Risk mitigation strategies Risk description Potential impact Risk mitigation strategies Risk description Potential impact Risk mitigation strategies The Group’s growth potential is dependent on the success of its customers and the growth of their packed meat sales. The Group’s products carry the brand labels of the customer to whom its products are supplied and it is therefore dependent on its customers’ success in maintaining or improving consumer perception of their own brand names and packed meat offerings. The Group plays a very pro-active role in enhancing its customers’ brand values, through providing high quality, competitively priced products, high service levels and continuing product and packaging innovation. It recognises that quality and traceability assurance is integral to its customers’ brands and works closely with its customers to ensure rigorous quality assurance standards are met. It is continuously measured by its customers across a very wide range of parameters, including delivery time, product specification, product traceability and accuracy of documentation and targets demanding service levels across all these parameters. The Group works closely with its customers to identify continuing improvement opportunities across the supply chain, including enhancing product presentation, extending shelf life and reducing wastage at every stage. The progress of the Group’s business is dependent on the macroeconomic environment and levels of consumer spending in the countries in which it operates. No business is immune to difficult economic climates and the consequent pressure on levels of consumer spending, such as those seen over recent years across Europe. With a sound business model, strong retail partners and a single- minded focus on minimising unit packing costs, whilst maintaining high levels of product quality and integrity, the Group has made sound progress over the recent difficult economic period. It expects to be able to continue to make progress, even if the current pressures on consumer spending, as expected, persist in some developed countries. The Group’s business is reliant on a small number of key personnel and its ability to manage growth and change successfully. The Group is critically dependent on the skills and experience of a small number of senior managers and specialists and as the business develops and expands, the Group’s success will inevitably depend on its ability to attract and retain the necessary calibre of personnel for key positions, both for managing and growing its existing businesses and setting up new ones. To continue to manage growth successfully, the Group will carefully manage its skill resources and continue to invest in on-the-job training and career development, together with the cost effective management of quality information and control systems, whilst recruiting high quality new employees, as required, to facilitate the Group’s ongoing growth. The continuing growth of Hilton’s business, together with its growing reputation, is facilitating the recruitment of more top class specialists with the key skill sets required both to support our existing individual country business units and manage the Group’s future geographical expansion. Financial statementsGovernance OverviewStrategic reportHilton Food Group plcAnnual report and financial statements 201324 Risk management and principal risks continued Risk description Potential impact Risk mitigation strategies Risk description Potential impact Risk mitigation strategies The Group’s business is dependent on maintaining a wide and flexible global meat supply base operating at standards that can continuously achieve the specifications set by Hilton and its customers. The Group is reliant on its suppliers to provide sufficient volume of products, to the agreed specifications, in the very short lead times required by its customers. The Group sources certain of its meat requirements globally. Tariffs, quotas or trade barriers imposed by countries where the Group procures meat, or which they may impose in the future, together with the progress of World Trade Organisation talks and other global trade developments, could materially affect the Group’s international procurement ability. The Group maintains a flexible global meat supply base, which is progressively widening as it expands and is continuously audited to ensure standards are maintained, so as to have in place a wide range of options should any such eventualities occur. Outbreaks of disease and feed contamination affecting livestock and media concerns relating to these and instances of product adulteration can impact the Group’s sales. Reports in the public domain concerning the risks of consuming meat can cause consumer demand for meat to drop significantly in the short to medium term. A food scare similar to the Bovine Spongiform Encephalopathy (“BSE”) scare that took place in 1996 or the much more recent concerns with regard to horse meat substitution can affect public confidence in red meats. The Group sources its meat from a trusted raw material supply base, all components of which meet stringent national, international and customer standards. The Group is subject to demanding standards which are independently monitored in every country and reliable product traceability and high welfare standards from the farm to the consumer are integral to the Group’s business model. The Group ensures full traceability from source to packed product across all suppliers. The Board has overall responsibility for the Group’s risk management processes and also for the appropriate identification of risks and the effective application of actions designed to mitigate those risks. All types of risk applicable to the business are regularly reviewed and a formal risk assessment is carried out to highlight key risks to the business and to determine actions that can reasonably and cost effectively be taken to mitigate them. The Group’s Risk Register is compiled through a combination of business unit risk registers and Board input. The Board believes that in carrying out the Group’s businesses it is vital to strike the right balance between an appropriate and comprehensive control environment and encouraging the level of entrepreneurial freedom of action required to seek out and develop new business opportunities, but, however skilfully this balance between risk and reward is struck, the business will always be subject to a number of risks and uncertainties, as illustrated above. Not all the risks listed are within the Group’s control and others may be unknown or currently considered immaterial, but could turn out to be material in the future. The risks set out in the above table, together with our risk mitigation strategies, should be considered in the context of the Group’s risk management and internal control framework, details of which are set out in the Corporate governance statement. Hilton Food Group plcAnnual report and financial statements 2013Corporate and social responsibility report 25 Hilton Food Group recognises its social, ethical and environmental responsibilities arising from its operations and to the welfare of employees, customers, suppliers and the communities in which we operate. The Group is committed to working in an ethical, open and honest manner to produce products of the highest quality responsibly and sustainably. The philosophies which underpin our policies for the environment, regulatory compliance, health and safety, product quality and integrity and ethical conduct are summarised below. Complete food assurance from farm to fork It is essential that consumers have complete confidence in the meat products they purchase and correct product label information is key to gaining consumer trust. Hilton has a pivotal role in managing a supply chain which starts on the farm. Our oversight of farm and abattoir standards ensures that the meat products we produce are of the highest quality and that the label correctly describes its provenance including species and country of origin. Hilton strives, in partnership with our retail customers, to successfully deliver safe, consistently high quality, convenient and ready to use retail packs of beef, lamb, pork and added value meat products to ensure the highest level of consumer satisfaction. Our products are governed by EU legislation and food safety standards throughout the meat supply chain. Additionally our retail partners, who support the Global Food Safety Initiative, demand the best animal welfare standards, food factory standards and quality systems to enhance their levels of brand integrity. A short and transparent supply chain with full traceability Hilton is committed to ensuring that the supply chain in which we play a significant part is as short as possible. Farm reared animals are slaughtered at abattoirs from whom Hilton sources its meats and our food products are delivered directly to our retail customers for sale in their stores. Our quality systems provide full traceability of all meat that we use. Where our meat comes from As specialist retail meat packers, Hilton can source its requirements for primal meat from the most advanced abattoir plants to exacting specifications, ensuring cost effectiveness. Most of our meat is sourced locally within the EU and also from other regions such as New Zealand and South America. Science and technology plays a large part in the consistent achievement of meat quality and influences Hilton’s procurement of meat from large and small suppliers. Together with our retail partners we ensure that consumers have the best choice and can select on the basis of provenance, quality and price. For example, Hilton is able to focus its meat sourcing strategy on high quality pasture fed beef from Ireland and good welfare produced pork from the Netherlands, UK, Germany and Denmark where efficient production methods enable competitive prices. Farm standards Good quality meat can only be produced from animals reared and handled to the best animal welfare standards as freedom from stress is a fundamental requirement not only for ethical and sustainable reasons, but also to achieve consistent meat quality for consumers. In addition farmers give a lot of thought to animal nutrition not only to achieve efficient weight gain but also to meet consumer demands on flavour and fat content. Hilton works closely with its suppliers and the farming community to continually improve the cleanliness of animals presented for slaughter as this has a direct effect on the reduction of any pathogen risks associated with fresh meat. Abattoir standards It is well established in science that abattoir standards contribute significantly to the achievement of consistent meat quality. Hilton works closely with our retail partners to set best in class specifications ensuring humane and effective stunning and control of microbial contamination. Also pH and temperature drop is controlled according to best scientific practice. Meat is matured and boned according to clear and enforced primal specifications that are agreed between Hilton, its retail customers and abattoir suppliers. Hilton develops long term trading partnerships with our suppliers by facilitating achievement of our retail customer requirements through auditing by third party experts and development of sustainable corrective action plans where any non-conformances are identified. We support our suppliers in applying abattoir standards covering factory structure, animal welfare standards, control of contamination through cleaning and disinfection, temperature controls, carcass dressing, boning and packing standards and traceability. Auditing as a means of challenging standards is now expected by consumers together with well established procedures throughout the food chain. Hilton continually develops and refines data collection and reporting particularly in the key area of meat raw material. Samples collected from each delivery are assessed for compliance to microbiological standards and compliance to agreed quality specifications. Results are used to assess the performance of suppliers and achieving continuous improvement. Retail packing at Hilton We are proud of our modern specialised meat processing and packing facilities which use state of the art production equipment, including a high degree of automation and use of robotic equipment which minimises handling. Financial statementsGovernance OverviewStrategic reportHilton Food Group plcAnnual report and financial statements 201326 Corporate and social responsibility report continued Environment The Group takes all practicable steps to manage carefully its impact on the natural environment. We believe improvements to our environmental performance can make a difference to society and are committed to assessing the impacts of our operations on land, water, air and biodiversity, and to managing our waste, in all its forms, by reusing or recycling it, where practicable. In the context of the total carbon footprint of retail packed meat, the proportion which can be influenced by Group’s packing activity is very small indeed, as the Group is not involved in the breeding, growing and slaughtering of animals and the packaging formats used for its products are selected by our customers. The Group is nevertheless committed, working closely with its customers, to minimising its environmental impact. Regulatory compliance The Group is in full compliance with all environmental regulations, permits and consent limits which apply to each of its packing plants in each country of operation and views such compliance as a high priority, looking to make continuing improvements with respect to the environment in all its operations whilst ensuring that we manage our environmental performance in accordance with evolving legal and regulatory requirements and international standards. Carbon footprint and greenhouse gases The Group has complied with all the mandatory reporting requirements under the Companies Act 2006 (Strategic Report and Directors’ Reports) Regulations 2013. The Group’s scope 1 and scope 2 carbon footprint has been calculated using data gathered through standardised reporting channels and Defra conversion factors. An appropriate ratio to express the Group’s annual emissions in relation to its activities by way of product volumes produced is given below. Scope 1 Scope 2 Total 2013 2012 2011 Tonnes of CO2e 8,162 21,466 29,628 Tonnes of CO2e per tonne of product 0.13 0.13 0.14 Our well trained production operatives are responsible for the quality of Hilton’s retail partners’ products and they are supported by highly qualified and experienced quality assurance and technical teams at each site. Hilton maintains annual third party accreditation through FSSC (Food Safety System Certification) using ISO 22000 and PAS 220 or BRC (British Retail Consortium) Issue 6 and we constantly challenge ourselves through cross auditing of hygiene and quality system standards by technical and quality managers from other Hilton sites. In addition we welcome the constant attention of our retail customers who make frequent visits to our sites; some of which are unannounced. This level of attention is a valuable part of our partnership with our retail customers and gives consumers confidence that Hilton can consistently meet their expectations. Temperature control throughout our storage and production departments is fundamental to the quality of our products and this is centrally controlled with alarm alerts if there is any deviation from specified temperature requirements. Specialised highly trained hygiene teams deep clean our factories every day using the latest technology and these clearly specified procedures are verified using not only trained auditors but also the latest monitoring equipment. Top quality meat from our suppliers, temperature control and high class standards of hygiene ensure that Hilton’s retail partners receive product that consistently achieves agreed shelf life and meets customer expectations. All staff and visitors can only enter Hilton production facilities wearing specified personal protective clothing and by passing through barrier protected hand washing and sanitising facilities. The effectiveness of these entrance procedures are routinely verified using hand swabbing checks. New product development is carried out in partnership with our retail customers and we pride ourselves on the kitchen facilities that Hilton has to facilitate this process of innovation and development. It is a fundamental strength of the Hilton team that a culture of sharing best practice is encouraged and developed. Technical managers from all our sites meet regularly to share experiences, agree innovation initiatives and develop processes and systems to ensure that Hilton remains at the forefront of our industry. Graduate recruitment is fundamental to Hilton’s future and our training programme includes completion of a Food Science masters degree at Bristol University following which our trained graduates are placed into key management roles. We maintain strong links with academia and technological advances through Campden BRI, Bristol University and attendance at the annual International Conference of Meat Science and Technology. Awards and Innovation Hilton takes great pride in its products and we are delighted when the quality and innovation of these products is recognised. During 2013 we received a number of national food and taste awards. New products were launched including skin pack steak boxes and gourmet and other oven ready and marinated products. Hilton Food Group plcAnnual report and financial statements 201327 Energy usage Our processing and packing operations consume electricity, gas, water and industrial gases at all our sites and our management teams work to identify areas for further efficiency gains in terms of energy usage. The Group invests heavily in maintaining state of the art high speed packing facilities which progressively reduce energy costs per unit packed. Over time the development of packing technology means that any given volume of meat can be packed with fewer high speed lines. Performance on water usage is shown below: 2013 2012 2011 M3 of water use per tonne of product 2.04 2.09 1.79 Waste and packaging A degree of wastage is unavoidable in our businesses, as we have to ensure that our products continually meet stringent standards for quality and presentation. We work actively to reduce our usage of materials and the reduction of product and packaging waste has a very high priority across the Group. The yield losses incurred in processing and packing meat and packaging wastage are monitored throughout each day across the entire product range, at every Hilton site. Performance on meat yields, being the percentage by which the weight of meat purchased as raw material compares with that incorporated in finished packed meat products, is minimised by, where possible, using off-cuts in mince, burgers and other part processed meat products and by ensuring that meat purchased meets tight specifications. Packaging is useful as it protects our products and prolongs shelf life thus reducing food waste and this benefit offsets the environmental impact of the materials and energy used in its manufacture. Hilton is committed with its retail partners to reducing packaging through use of lightweight and recyclable materials from sustainable sources. Workplace Health and safety One of Hilton’s top priorities is to achieve continual improvements in health and safety. The Group requires all its subsidiaries to achieve high health and safety standards within their individual operations. All subsidiaries conduct regular formal health and safety reviews. Managers and employees review policies, processes and procedures in order to ensure that risks are properly assessed, with appropriate actions taken in order to protect the safety of employees. Two members of the Board, Philip Heffer and Theo Bergman, have been assigned responsibility for health and safety and environmental matters across the Group’s operational sites. We monitor and review all incidents and accidents in the workplace so that we can take appropriate action to improve working conditions whilst remaining focused on reducing both the absolute number of accidents and the number of serious accidents. Formal reporting procedures are in place at every site so that the Group can monitor safety performance at a local level. There is a full time safety officer at each site who monitors the key measures for safety performance which include the number of serious and non-serious accidents and the number of working days lost through injury, together with short and long term sickness levels, key statistics in relation to which for 2013 are shown as follows: Average number of employees 2,243 2,213 2,181 Recorded accidents per 100,000 hours worked 6.4 5.5 6.0 Serious accidents 32 26 10 Sickness rate (%) 4.9% 5.3% 5.2% 2013 2012 2011 Our people We recognise that driving our future growth and development will continue to depend on our ability to attract, grow, train and retain the very best managers and staff and to build progressively stronger teams at each location. We believe that a key to our future success lies in the promotion of properly trained, knowledgeable and capable management from within our organisation together with the ongoing motivation of our teams in each country. The Group provides equal opportunity for employment, training and career development and promotion regardless of age, sex, colour, race, religion, ethnic origin or other minority groupings. The Group encourages the employment of disabled people when suitable vacancies are available and wherever possible retrains employees who become disabled to enable them to do work consistent with their aptitudes and abilities. Where practicable a flexible approach is adopted to assist employees to manage a successful work life balance. Hilton operates to high standards of employment practice with policies to ensure that training, career development and promotion opportunities are available to all employees. The Group’s recruitment practices involve, where possible, internal promotions. Where there is not a suitable internal candidate, selection of suitable individuals for vacant positions is made using a combination of industry knowledge and contacts and the use of external recruitment agencies. All new senior employees including Directors are given tailored induction programmes. The Group’s succession planning is designed to highlight any forthcoming vacancies well in advance. Employees are able to participate directly in the success of the business by contributing to the Group’s Sharesave scheme. The Group has ethnically diverse workforces who at each location receive the same terms and conditions for comparable jobs. Given the geographical spread of the Group’s operations it is both inappropriate and impractical to apply standard employee consultation and communication procedures across the Group. Each subsidiary is accordingly responsible for achieving and maintaining appropriate consultation and communication with its employees which include at all production sites joint management and employee committee meetings on health and safety and meetings with employees and union representatives to discuss issues affecting them. The Group, in common with most commercial undertakings, employs external consultants, but, as their services could be contracted for with other similar parties, there are, in the opinion of the Board, no persons with contractual or other arrangements with the Group which are essential to its businesses. Financial statementsGovernance OverviewStrategic reportHilton Food Group plcAnnual report and financial statements 201328 Corporate and social responsibility report continued Trading relationships with partners and suppliers Strong and fair long term relationships with partners and suppliers are very important for Hilton. The Group’s approach to corporate social responsibility is reflected in the way we behave with our suppliers which is open, consistent and honest. In the UK the Group follows the Better Payment Practice Code which requires a company to agree the terms of payment with its suppliers, to ensure its suppliers are aware of those terms and to abide by them. The Group policy is also to apply the requirements of the Code in each of its subsidiaries. Community Supporting our local communities Hilton’s policy is to recruit locally based employees wherever possible in order to benefit the communities within which our plants are located. Hilton aims to play a positive role in all the communities in which it operates and we encourage employees to become involved with and support the local communities around our sites. We recognise the social impacts of our business and believe in consultation with local communities about our activities and about the safety and environmental impact of our operations. During 2013, Hilton made charitable donations amounting to £28,640 (2012: £17,585) comprising small but regular donations made to local institutions and sponsorship of personal charitable initiatives and cultural events. The Group seeks to be a good neighbour in all its locations. We are committed to social responsibility and believe that the success of our businesses will reflect the quality of the relationships we build with our communities and legitimate public interest groups. Ethical standards Hilton is committed to integrity. Ethical standards are very important in relation to the way we conduct our businesses and all the Group’s employees are expected to behave ethically in their work and adhere to the Group’s ethical standards. As an international group of companies we are fully aware of the broad spread of our responsibilities in all the countries in which we operate from protecting the environment to safeguarding the health and safety of our employees, respecting human rights, ensuring honesty, integrity and fairness in all our business dealings and operating our businesses in a safe and responsible manner. A whistle-blowing policy is in place in accordance with which staff can in confidence raise any concerns about any actual or potential improprieties in relation to matters of financial reporting or any other aspect of the Group’s businesses. The Group has also implemented an anti-bribery and anti-corruption policy to comply with the Bribery Act 2010. Hilton Food Group plcAnnual report and financial statements 2013Approval of Strategic report 29 Pages 7 to 29 of this Annual report comprises a Strategic report which has been drawn up and presented in accordance with applicable English company law, in particular Chapter 4A of the Companies Act 2006, and the liabilities of Directors in connection with this report shall be subject to the limitations and restrictions provided by such law. It should be noted that the Strategic report has been prepared for the Group as a whole, and therefore gives greater emphasis to the Company and its subsidiaries when viewed as a composite whole. Approved by the Board of Directors and signed on behalf of the Board. Neil George Company Secretary 26 March 2014 Financial statementsGovernance OverviewStrategic reportHilton Food Group plcAnnual report and financial statements 201330 Hilton Food Group plcAnnual report and financial statements 201331 Governance Board of Directors 32 Directors’ report Corporate governance statement Report of the Audit Committee Report of the Nomination Committee Report of the Risk Management Committee Directors’ remuneration report Directors’ remuneration policy Annual report on remuneration Statements of Directors’ responsibilities Independent auditors’ report 34 36 39 41 42 43 44 49 53 54 Financial statementsGovernance OverviewStrategic reportHilton Food Group plcAnnual report and financial statements 2013 32 Board of Directors Executive Directors Robert Watson obe Chief Executive Robert joined Hilton as Chief Executive in 2002 and has overseen the successful growth of the Group to date. Prior to this, he worked for the Foyle Food Group, based in Northern Ireland of which he was a founder in 1977. Robert was previously a board member of the Livestock Meat Commission and Food For Britain. Nigel Majewski Finance Director Nigel was appointed as Finance Director of Hilton in 2006 following 11 years in senior finance roles with PepsiCo. Prior to that Nigel gained extensive meat industry experience in senior finance roles with Bernard Matthews plc and has also worked for Royal Dutch Shell and Whitbread. He is a qualified Chartered Accountant and has a first class honours degree in accountancy. Nigel is Chairman of the Risk Management Committee. Philip Heffer Chief Operating Officer UK and Ireland Philip joined the Hilton Food Group at its inception in 1994, as Managing Director of the Group’s UK subsidiary Hilton Meats (Retail) Limited. In his current role he is responsible for Hilton’s business with its major customer in the UK and Ireland. Prior to this, Philip held senior positions within the RWM Food Group. He attended Smithfield College and became an associate member of the Institute of Meat in 1984. Theo Bergman Chief Operating Officer Continental Europe Theo joined Hilton in 2000 as Managing Director of the Group’s Dutch facility, Hilton Meats Zaandam and in 2003, he was appointed to the Group’s Executive Board as European operations director responsible for the start up of operations in Europe and the relationship with Ahold. Prior to joining Hilton, Theo held senior logistics and general management positions with Ahold between 1987 and 2000. Hilton Food Group plcAnnual report and financial statements 201333 Non-Executive Directors Sir David Naish dl Non-Executive Chairman Sir David joined the Hilton Food Group in 2007 as a Non-Executive Director after retiring from the Chairmanship of Arla Foods UK plc and was elected Chairman in 2010. He is a past President of the National Farmers Union and is currently Chairman of his family farming business as well as a Director of Wilson Insurance Broking Group Limited and Caunton Engineering Limited and is also a Non-Executive Director of Produce Investments plc. Sir David is Chairman of the Nomination Committee. Chris Marsh Non-Executive Director Chris joined the Hilton Food Group in 2007 as a Non-Executive Director. Chris is a corporate broker by background, he joined Phillips and Drew in 1968 and headed the Small Cap Corporate broking team at UBS from 1993 until his retirement in 1998. From 1999 to 2004 he was a member of a small corporate finance advisory team at the Benfield Group. Chris is currently Non-Executive Chairman of Webb Capital plc and formerly of Downing Income VCT plc. Chris is the Senior Independent Director and Chairman of the Remuneration Committee. Colin Smith obe Non-Executive Director Colin joined the Hilton Food Group in 2010 as a Non-Executive Director and has extensive experience in the food and distribution industry. A Chartered Accountant, he was at Safeway plc for 20 years as Finance Director and for the last six years as Chief Executive. Colin has previously held Chairmanships at food and agriculture businesses Assured Food Standards, Masstock Group and Blueheath Holdings plc. Until recently he was a Non-Executive Director of Poundland Holdings Limited having stepped down as Chairman after ten years in the role. He was previously a Non-Executive Director of McBride plc. Colin is Chairman of the Audit Committee. David Naish, Chris Marsh and Colin Smith are all members of the Remuneration, Audit and Nomination Committees. Chris Marsh and Colin Smith are considered to be independent. Financial statementsGovernance OverviewStrategic reportHilton Food Group plcAnnual report and financial statements 201334 Directors’ report The Directors present their Annual report and the audited consolidated financial statements for the 52 weeks ended 29 December 2013. Political donations No donations for political purposes were made during the year (2012: £nil). Principal activities The Group’s activities comprise specialist retail meat packing for international food retailers. Share capital and control The following information is given pursuant to Section 992 of the Companies Act 2006: – the Company has one class of share being ordinary shares of 10p each which have no special rights. The holders of ordinary shares rank equally and are entitled to receive dividends and return of capital as declared and to vote at general meetings. With minor exceptions, there are no restrictions on transfers of ordinary shares. – there are no restrictions on voting rights of ordinary shares. – rights over ordinary shares issued under employee share schemes are exercisable directly by the employees. The Company is not aware of any agreements between shareholders that may result in restrictions on the transfer of its shares or on voting rights. – the Company may appoint or remove a Director by an ordinary resolution of the shareholders. Additionally the Board may appoint a Director who must retire from office at the following Annual General Meeting and if eligible then stand for re-election. – the Company’s Articles may be amended by a special resolution of the shareholders. – the Directors have general powers to manage the business and affairs of the Company. Additionally the following specific authorities were passed as resolutions at the Company’s Annual General Meeting held on 15 May 2013: – Directors have authority to purchase up to 10% of its own shares subject to certain conditions. – Directors have authority, within limits, to exercise the powers of the Company to allot shares and limited authority to disapply shareholder pre-emption rights. Both these authorities expire on the earlier of the date of the next Annual General Meeting or 15 August 2014. – the Company has significant long term supply agreements with customers which the customer may terminate in the event that ownership of the Company, following a takeover, passes to a third party which is not reasonably acceptable to that customer. There are no agreements between the Company and its Directors or employees providing for compensation for loss of office or employment that occurs because of a takeover bid. Strategic report The business report has been replaced with a strategic report on pages 7 to 29 which sets out the development and performance of the Group’s business during the financial year, the position of the Group at the end of the year and a description of the principal risks and uncertainties facing the Group. Results and dividends The profit before income tax is £24.9m (2012: £24.7m). An interim dividend of 3.65p per ordinary share was paid in December 2013. The Directors recommend the payment of a final dividend for the period, which is not reflected in these accounts, of 9.1p per ordinary share totalling £6.6m, which, together with the interim dividend, represents 12.75p per ordinary share for the year. Subject to approval at the Annual General Meeting, the final dividend will be paid on 27 June 2014 to members on the register at the close of business on 30 May 2014. Shares will be ex dividend on 28 May 2014. Directors and their interests The Directors of the Company in office throughout 2013, together with their biographical details, are as set out on pages 32 and 33. All the Directors served for the whole of the year under review unless stated. Details of Directors’ interests in shares are provided in the Directors’ remuneration report on page 50. Directors are subject to re-appointment at the Company’s AGM following the year in which they are appointed. In accordance with the Company’s Articles of Association one-third of the Board is subject to re-election at each AGM. Accordingly, Theo Bergman, Nigel Majewski and Colin Smith retire and, being eligible, offer themselves for re-election. Substantial shareholdings As at the date of this report, the Company is aware or has been notified of the following interests of 3% or more of the voting rights of the Company: Number of ordinary shares Fidelity Management & Research 6,775,337 6,351,159 Aberforth Partners 4,750,000 AXA Investment Managers SA 4,174,500 G. Heffer 4,174,500 R. Heffer 2,482,171 FIL Investment International 2,416,069 Hargreave Hale Percentage of issued share capital Nature of holding 9.36% Indirect 8.80% Indirect 6.58% Indirect Direct 5.78% 5.78% Direct 3.44% Indirect 3.35% Indirect Additionally Directors’ interests in shares total 10.69% and details are given on page 50. Hilton Food Group plcAnnual report and financial statements 2013 35 Independent auditors PricewaterhouseCoopers LLP have expressed their willingness to continue in office and a resolution proposing their reappointment will be submitted at the Annual General Meeting. Annual General Meeting The Notice convening the Annual General Meeting can be found in the separate Notice of Annual General Meeting accompanying this Annual report and financial statements, and can also be found on the Company’s website at www.hiltonfoodgroupplc.com/investors/agm. By order of the Board Neil George Company Secretary 26 March 2014 Share options Details of all options granted but not exercised or lapsed are shown in note 23 to the financial statements on page 82. Corporate governance The Board has applied, for the first time in 2013, the provisions of the UK Corporate Governance Code issued in September 2012. The Directors consider that the Company has during 2013 complied with the requirements of the UK Corporate Governance Code taking into account the provisions for smaller companies. The Corporate governance statement on pages 36 to 38 includes information pursuant to DTR 7.2. Financial instruments The Group’s risk management objectives and policy are discussed in the treasury management policies section of the Performance and financial review on page 20. Directors’ statement as to disclosure of information to auditors The Directors who were members of the Board at the time of approving the Directors’ report are listed on pages 32 and 33. Having made enquiries of fellow Directors and the Company’s auditors, each of these Directors confirm that: – to the best of each Director’s knowledge and belief, there is no information relevant to the audit of which the Company’s auditors are unaware; and – each Director has taken all the steps a Director might reasonably be expected to have taken to be aware of any relevant audit information and to establish that the Company’s auditors are aware of that information. Financial statementsGovernance OverviewStrategic reportHilton Food Group plcAnnual report and financial statements 201336 Corporate governance statement The UK Corporate Governance Code The Board has prepared this report with reference to the UK Corporate Governance Code issued in September 2012 which applies to accounting periods beginning on or after 1 October 2012. The provisions of this Code can be obtained from www.frc.org.uk/corporate/ukcgcode.cfm. This statement and the Directors’ remuneration report on pages 43 to 52 detail how the Board applies the principles of good governance and best practice as set out in this UK Corporate Governance Code. The Directors consider that the Company has during 2013 complied with the nine requirements of this Code, taking into account the provisions for smaller companies. The Board Membership At the date of this report the Board consists of four Executive Directors and three Non-Executive Directors whose names, responsibilities, brief biographies and membership of Board Committees are set out on pages 32 and 33. The Directors bring strong judgement and expertise to the Board’s deliberations and the Board is of sufficient size and diversity to achieve the balance of skills and experience appropriate for the requirements of the business. Non-Executive Directors The Non-Executive Directors include the Non-Executive Chairman and the Senior Independent Director. With the exception of the Non-Executive Chairman, who is presumed under the Code not to be independent following his appointment, the Board considers the Non-Executive Directors to be independent. The Non- Executive Directors do not participate in any of the Group’s pension arrangements or in any of the Group’s bonus or share option schemes. There is a clear written division of responsibilities between the Non-Executive Chairman and the Chief Executive which has been agreed by the Board. Senior Independent Director Chris Marsh, the Senior Independent Director, is available to shareholders as an alternative to the Non-Executive Chairman, Chief Executive and Finance Director. He ensures that he is available to meet shareholders, as required, and reports any relevant findings to the Board. Rotation of Directors The Company’s Articles of Association provide that one-third of the Directors retire by rotation at each Annual General Meeting and that all new Directors are subject to re-appointment by shareholders at the first opportunity following their appointment. Theo Bergman, Nigel Majewski and Colin Smith retire in accordance with the Articles of Association at the forthcoming Annual General Meeting and, being eligible, each offers himself for re-election. Directors’ conflicts of interest Under the Companies Act 2006, the Group’s Directors have an obligation to avoid any situation where they have a conflict of interests. The Group has in place procedures that require all Directors to notify the Group of any conflicts of interest and, for any such conflicts of interest to be authorised by non-interested Directors, provided the Company’s articles allow for this. During the current financial year the Group were not advised of nor did the Group identify any such conflicts of interest. Information and support provided to Board members Members of the Board and its Committees are given appropriate documentation in advance of each Board and Committee meeting. For regular Board meetings these include a detailed period report on current and forecast trading, with comparisons against both budget and prior years. For all meetings, appropriate explanatory papers are circulated well in advance on matters which the Board or Committee will be required to approve or provide responses. The Board operates both formally through Board and Committee meetings and informally through regular contact between Directors. To assist them in carrying out their responsibilities the Directors have, in addition to full and timely access to all relevant information from management in advance of Board meetings, the right to obtain independent professional advice at the Company’s expense and the advice and services of the Company Secretary to enable them to perform their duties as Directors. The Company Secretary is responsible to the Board, through the Chairman, for all governance matters. The appointment and removal of the Company Secretary is determined by the Board as a whole. Board responsibilities The Board is collectively responsible for promoting the success of the Group, within a framework of prudent and effective controls that enable risk to be assessed and appropriately managed. It is responsible for setting and approving the strategy and key policies of the Group and monitoring the progress towards achieving these objectives. The Board aims to enhance shareholder value by providing entrepreneurial leadership for the Group, whilst simultaneously ensuring the appropriate framework of checks and balances are maintained in place. The Board has specific powers reserved to it contained in a schedule of matters reserved for decision by the Board which include: – acquisitions and disposals; – major trading agreements; – major capital expenditure projects; – dividends; – treasury and risk management policies; – approval of budgets, half-yearly and annual accounts and interim management statements; and – the giving of any guarantees or letters of comfort. Hilton Food Group plcAnnual report and financial statements 201337 The Board meets not less than eight times a year to direct and control the strategy and operating performance of the Group. The Board also has responsibility for setting policy and monitoring from time to time such matters as financial and risk control, health and safety policy, environmental issues and management succession and planning. The Board has delegated to the Chief Executive and the Executive Directors responsibility for the execution of the agreed strategy and budget and the day-to-day management of the Group’s operations. Day-to-day decisions in relation to procurement and supply chain management, factory operations and customer liaison are delegated to the senior management teams at each operational site. Board Committees The Board has delegated certain responsibilities to the following Board Committees: – Nomination Committee; – Audit Committee; – Remuneration Committee; and – Risk Management Committee. Each Board Committee operates under clearly defined terms of reference and report regularly to the Board. These terms of reference are reviewed on a regular basis with any revisions proposed to the Board for its approval. The Board ensures that each Committee has sufficient resources to undertake their duties including access to the Company Secretary and external advisors as appropriate. Reports for each Board Committee are included on pages 39 to 52. Meeting attendance The following table sets out the Board and Committee meeting attendance by Board members, including the maximum number of meetings which could have been attended. Board Audit Committee Remuneration Committee Nomination Committee Risk Management Committee Number of meetings R. Watson P. Heffer T. Bergman N. Majewski D. Naish C. Marsh C. Smith 11 10 9 11 11 11 10 10 5 5 4 4 5 9 9 4 1 4 4 4 1 1 1 Performance evaluation The Non-Executive Chairman leads a formal annual performance evaluation of the Board and its standing Committees and meets with the Non-Executive Directors at least once a year to convey his conclusions. During 2013 an internal evaluation process involved each Director completing a detailed written questionnaire including the opportunity to comment on any issue not directly covered by the questionnaire. The responses were analysed and considered by the Board who have concluded that the Directors, the Board and its standing Committees continue to perform effectively. The Non- Executive Directors met once during the year without the Non- Executive Chairman present in order to evaluate his performance. Shareholder communications The Board promotes open communication with shareholders. The Chief Executive and Finance Director meet regularly and have dialogue with institutional shareholders both to discuss the Group’s performance and prospects and to develop an understanding of their views which are relayed back to the Board. The Board’s current assessment of the Group’s position and prospects are set out in the Strategic report on pages 7 to 29. Twice a year general presentations are given to analysts covering the annual and half-year results and other reports and forecasts, together with relevant articles in the financial press, are circulated to the Board. The other Executive Directors are available to meet the Company’s major shareholders if required and the Senior Independent Director is available to listen to the views of shareholders, should they have concerns which have not been previously resolved or which it was inappropriate to voice at prior meetings. All shareholders have the opportunity to ask questions at the Company’s Annual General Meeting, which all Directors and the Chairmen of every Board Committee attend. In addition, the Group’s website containing published information and press releases can be found at www.hiltonfoodgroupplc.com. Risk management and internal control The Board of Directors has overall responsibility for the Group’s systems of internal control including financial, operational and compliance controls and risk management which operate to safeguard the shareholders’ investments and the Group’s assets and for reviewing their continuing effectiveness. Such an internal control system can only provide reasonable and not absolute assurance against material misstatement or loss as it is designed to manage rather than eliminate risk and failure to meet business objectives. Financial statementsGovernance OverviewStrategic reportHilton Food Group plcAnnual report and financial statements 201338 Corporate governance statement continued The Group operates within a clearly defined organisational structure with established responsibilities, authorities and reporting lines to the Board. The organisational structure is designed to plan, execute, monitor and control the Group’s objectives effectively and ensure internal control becomes integral to all the Group’s operations. The Board confirms that the Group’s internal risk based control systems have been fully operative up to the date of the Annual report being approved, key ongoing processes and features of which are set out below: – appropriate mechanisms to identify and evaluate business risk; – a Group internal audit function which is involved in the review and testing of the internal control systems and of key risks across the Group in accordance with an annual programme agreed with the Audit Committee; – a strong control environment; – an information and communication process; and – a monitoring system and regular Board reviews for effectiveness. The Group’s planning and financial reporting procedures include detailed budgets and a three year strategic plan which are approved by the Board. Periodic management accounts report performance compared to the budget and additionally forecasts are updated through the year. These management accounts together with half-yearly and annual accounts produced by the Group’s subsidiary companies are reviewed together with the methodology used for consolidating these into the periodical, half-yearly and annual accounts. All financial information published by the Group is approved by the Board and Audit Committee. The Finance Director and Group Financial Controller are responsible for overseeing the Group’s internal controls. The management of the Group’s businesses have identified the key business risks within their operations, considered their financial implications and assessed the effectiveness of the control processes in place to mitigate these risks. The Board has reviewed a summary of these findings and this, together with its direct involvement in the strategies of the business, investment appraisal and budgeting processes, has enabled the Board to report on the effectiveness of the Group’s internal control systems, which comply with the Turnbull Guidance. Auditor independence The Board is satisfied that PricewaterhouseCoopers LLP has adequate policies, processes and safeguards in place, including partner rotation designed to ensure that auditor objectivity and independence is maintained. The Company meets its obligations for maintaining the appropriate relationship with the external auditors through the Audit Committee whose terms of reference include an obligation to consider and keep under continuing review the degree of work undertaken by the external auditors, other than the statutory audit, so as to ensure such objectivity and independence is safeguarded. Details of fees for non-audit work are set out in note 6 on page 72 of the financial statements. By order of the Board Neil George Company Secretary 26 March 2014 Hilton Food Group plcAnnual report and financial statements 2013Report of the Audit Committee 39 Chairman’s introduction I am pleased to report on the activities of the Audit Committee for the 52 weeks ended 29 December 2013. Role of the Committee The Audit Committee is established by the Board of Directors and terms of reference formalises its roles, tasks and responsibilities to comply with the UK Corporate Governance Code and to achieve best practice. The Committee terms of reference are available and can be found on the Company’s website at www.hiltonfoodgroupplc.com. The Committee meets at least three times per year. Membership of the Committee Members of the Committee are appointed by the Board on the recommendation of the Nomination Committee and comprise the Chairman of the Committee and at least two members who are the Chairman of the Board and the Independent Non-Executive Directors. At least one member has recent and relevant financial experience and between them have a wide experience of industry and commerce. Other individuals such as the Chief Executive, Finance Director, Internal Auditor and the external auditors may be invited to attend meetings. The external auditors and the Internal Auditor have the opportunity for direct access to the Committee without the Executive Directors being present. Responsibilities of the Committee The main responsibilities of the Audit Committee which are contained in the UK Corporate Governance Code and also in the Committee’s terms of reference are: – to monitor the integrity of the financial statements of the Company and any formal announcements relating to the Company’s financial performance, reviewing significant financial reporting judgements contained in them; – to review the Company’s internal financial controls and to review the Company’s internal control and risk management systems; – to monitor and review the effectiveness of the Company’s internal audit function; – to make recommendations to the Board, for it to put to the shareholders for their approval in general meeting, in relation to the appointment, re-appointment and removal of the external auditor and to approve the remuneration and terms of engagement of the external auditor; – to review and monitor the external auditor’s independence and objectivity and the effectiveness of the audit process, taking into consideration relevant UK professional and regulatory requirements; – to develop and implement policy on the engagement of the external auditor to supply non-audit services, taking into account relevant ethical guidance regarding the provision of non-audit services by the external audit firm; and to report to the Board, identifying any matters in respect of which it considers that action or improvement is needed and making recommendations as to the steps to be taken; and – to report to the Board on how it has discharged its responsibilities. How the Committee has discharged its responsibilities During 2013 the Committee met five times at appropriate intervals in the financial reporting and audit cycles. Attendance at these meetings is set out on page 37. The work of the Committee during the year focused on the key areas set out below. Monitoring the integrity of the Financial Statements including significant judgements The Group’s accounting policies were reviewed and it was considered that there were no critical accounting estimates or judgements in their application. The Committee reviewed half and full year financial reports including the application of accounting policies, estimates and judgements in their preparation, the clarity and completeness of the disclosures and also held discussions with management and the external auditors. The Annual report and financial statements were, taken as a whole, considered to be fair, balanced and understandable and provide the information necessary for shareholders to assess the Group and Company’s performance, business model and strategy. The Committee considered and concluded that the Group should be considered as a going concern. Thereafter the Committee recommended that the Board approve these financial reports for publication and that the letter of representation to the external auditors be signed. Risk management and internal controls During the year the Internal Auditor reported to the Committee on the internal audit work performed which included compliance with the Bribery Act and saw continuing improvement across the Group’s operations and on key focus areas for future work. The Group’s Risk Register was also updated. The Committee concluded that the internal audit function remains effective. A review of whistle-blowing showed that no employees had raised any concerns about possible wrongdoing in financial reporting or other matters. The Committee reviewed and updated the Group’s hedging strategies with the objective of reducing volatility and identifying and reducing risks whilst maintaining transparency. The Committee evaluated the risks associated with the Group’s new Australian joint venture. Financial statementsGovernance OverviewStrategic reportHilton Food Group plcAnnual report and financial statements 201340 Report of the Audit Committee continued External audit The Committee oversees the relationship with, and the performance of, the external auditors. Meetings were held before the audit to agree their audit plan and after their audit work to discuss their key audit findings. The level of non-audit fees was reviewed which in 2013 at £71,000 decreased to 28% of audit fees. The Committee considers that this low level of non-audit fees does not affect the independence of the external auditors. The current external auditors were appointed in 2007. Their lead partner is rotated every five years to ensure continued objectivity and independence. Hilton is not subject to the provision in the UK Corporate Governance Code that the external audit contract should be put out to tender at least every ten years. The Committee continues to be satisfied with the performance of PricewaterhouseCoopers LLP and have therefore recommended to the Board that they should continue as the Group’s auditors at the forthcoming Annual General Meeting. The Committee reviewed a letter received from the external auditors confirming their independence as required. Non-audit fees Hilton has implemented a policy on the use of external auditors for non-audit services designed to preserve the independence of the external auditors. This policy categorises non-audit services into (i) continuing services which the Committee permits external auditors to undertake subject to a price cap, (ii) irregular or significant services requiring Committee approval on a case by case basis and (iii) non- permitted services. Other The Committee terms of reference were updated during the year reflecting changes in legislation and the UK Corporate Governance Code. Conclusion The Committee considers that the work performed as detailed above demonstrates that the Committee continues to operate effectively and discharges its responsibilities. I will be available to shareholders at the forthcoming Annual General Meeting to respond to any questions relating to the work of the Committee. On behalf of the Audit Committee Colin Smith obe Chairman 26 March 2014 Hilton Food Group plcAnnual report and financial statements 2013Report of the Nomination Committee 41 Chairman’s introduction I am pleased to report on the activities of the Nomination Committee for the 52 weeks ended 29 December 2013. Role of the Committee The Nomination Committee is established by the Board of Directors and terms of reference formalises its roles, tasks and responsibilities to comply with the UK Corporate Governance Code and to achieve best practice. The Committee terms of reference are available and can be found on the Company’s website at www.hiltonfoodgroupplc.com. The Nomination Committee leads the process for Board appointments. How the Committee has discharged its responsibilities During 2013 the Committee met once in a continuing stable environment where it did not need to consider any new appointments. The Chairman has discussions with each Director to review and agree their training and development needs. The Committee terms of reference were updated during the year following a review. Conclusion The Committee considers that the work performed as detailed above demonstrates that the Committee continues to operate effectively and discharges its responsibilities. The Committee meets on an as required basis. Membership of the Committee Members of the Committee comprise all the Non-Executive Directors. I will be available to shareholders at the forthcoming Annual General Meeting to respond to any questions relating to the work of the Committee. On behalf of the Nomination Committee Sir David Naish dl Chairman 26 March 2014 Responsibilities of the Committee The main responsibilities of the Nomination Committee which are contained in the UK Corporate Governance Code and also in the Committee’s terms of reference are: – to review the structure, size and composition of the Board including skills, knowledge, experience and diversity (including gender) and make recommendations to the Board with regard to any changes; – to give consideration to succession planning for Directors and other senior executives and identify appropriate candidates for the approval of the Board; – to oversee new appointments to the Board; – to review the results of the Board performance evaluation relating to the composition of the Board; and – to review the time requirements of Non-Executive Directors. Financial statementsGovernance OverviewStrategic reportHilton Food Group plcAnnual report and financial statements 201342 Report of the Risk Management Committee Chairman’s introduction I am pleased to report on the activities of the Risk Management Committee for the 52 weeks ended 29 December 2013. How the Committee has discharged its responsibilities During 2013 the Committee met nine times and focused on the key areas set out below: Role of the Committee The Risk Management Committee is established by the Board of Directors and terms of reference formalises its roles, tasks and responsibilities to comply with the UK Corporate Governance Code and to achieve best practice. It seeks to focus and co-ordinate risk management activities throughout the Group in order to facilitate the identification, evaluation and management of key business risks. The Committee meets at least six times per year. Membership of the Committee Members of the Committee are appointed by the Board and comprise the subsidiary company operations managers, the Group Internal Auditor, the Group IT manager and other personnel throughout the Group as required. Responsibilities of the Committee The main responsibilities of the Risk Management Committee are: – Monitoring, identification and evaluation of potential risks to all the Hilton businesses; – Planning and preparation for ISO 22301 Business Continuity Management Systems; and – A protocol on sister site support in the event of business interruption to a particular operating unit to include identification of available capacity and the establishment of central labelling facilities. The Committee terms of reference were updated during the year following a review. Conclusion The Committee considers that the work performed as detailed above demonstrates that the Committee continues to operate effectively and discharges its responsibilities. – to raise the level of management awareness of and accountability for risks faced by the business; I will be available to shareholders at the forthcoming Annual General Meeting to respond to any questions relating to the work of the Committee. – to embed risk management into the Group culture; – to provide a mechanism for risk management issues to be discussed and disseminated; and – to provide advice on the co-ordination of risk management strategies across the Group ensuring they receive the appropriate level of sponsorship and support. On behalf of the Risk Management Committee Nigel Majewski Chairman 26 March 2014 Hilton Food Group plcAnnual report and financial statements 2013Directors’ remuneration report 43 Chairman’s introduction I am pleased, as Chairman of the Remuneration Committee, to present the Directors’ remuneration report for the 52 weeks ended 29 December 2013. Role of the Committee Remuneration policy is delegated by the Board to the Remuneration Committee established by the Board of Directors. Terms of reference formalises its roles, tasks and responsibilities to comply with the UK Corporate Governance Code and to achieve best practice. The Committee’s terms of reference are available and can be found on the Company’s website at www.hiltonfoodgroupplc.com. The Committee meets at least twice per year. Membership of the Committee Members of the Committee are appointed by the Board on the recommendation of the Nomination Committee and in consultation with the Chairman of the Remuneration Committee. The Committee comprises the Non-Executive Directors (Chris Marsh and Colin Smith) and the Non-Executive Chairman of the Board (Sir David Naish) who was considered to be independent on appointment. Other individuals such as the Chief Executive and external advisors may be invited by the Committee to attend meetings as and when required. Responsibilities of the Committee The main responsibilities of the Remuneration Committee which are contained in the UK Corporate Governance Code and also in the Committee’s terms of reference are: – setting the remuneration policy for all Executive Directors and the Company’s Non-Executive Chairman; – approving the design of, and determining the targets for, any performance-related pay schemes operated by the Company and to approve the aggregate annual payments made under such schemes; – reviewing the design of all share incentive plans for approval by the Board and shareholders; and – recommending and monitoring the level and structure of remuneration for senior management. Directors’ remuneration major decisions and substantial changes The Committee made the following major decisions during the year: Basic salaries: Following a review of Company and individual performance, changes in responsibility and levels of increase for the broader UK employee population the Committee agreed an Executive Director basic salary increase of 3.5% effective from 1 January 2014. Pension: In recognition of recent changes to pension rules it was decided that in certain circumstances a salary supplement may be paid to an Executive Director in lieu of making a pension contribution to their money purchase pension schemes. Annual bonus for Executive Directors: A 2013 non-financial metric award of 15% of salary was granted out of a maximum of 20% of salary reflecting the strong strategic progress achieved by the Company during 2013. Under the financial metric 26% of salary is payable reflecting the increase in actual net income in 2013 from the 2012 net income. The 2014 Executive Director bonus scheme financial element will have a threshold award of 20% for achieving the 2013 actual net income level rising to 105% for performance of at least 115% of 2014 budgeted net income. A further non- financial element of up to 20% of salary will remain available based on individual achievement against personal and strategic targets aggregating to a 125% maximum bonus opportunity for the Executive Directors. Long term incentive schemes: The performance condition attaching to the 2010 share option grant under the Executive Share Option Scheme required EPS growth in excess of RPI plus 3% per annum for the three years to the end of 2012. Actual EPS growth was 3.3% in excess of RPI and thus 100% of the share options vested. During 2013 a grant of nil cost options under the Long Term Incentive Scheme was approved with vesting subject to an EPS performance condition. Threshold performance is EPS growth of 5% per annum where 25% of the options will vest rising to EPS growth of at least 10% per annum where 100% of the options will vest. The EPS threshold and maximum growth hurdles were adjusted from 6% to 5% and from 14.5% to 10% respectively reflecting the current challenging macro-economic conditions. The Committee considered that the revised EPS growth hurdles are as challenging as the previous targets in the current circumstances. There will be a further invitation under Hilton’s Sharesave Scheme in 2014. External advisors The Committee has appointed New Bridge Street (part of Aon plc) to provide advice on remuneration matters and are satisfied that such advice is objective and independent. The amount paid for these services during the year amounted to £9,737 and no other services to the Company are provided. Share scheme dilution limits The Company applies established good governance restrictions over the issue of new shares under all its share schemes of 10% in 10 years and 5% in 10 years for discretionary schemes. As at 29 December 2013 the headroom available under these limits was 4.1% and 0% respectively. Statement of voting at annual general meeting This Directors’ remuneration report is subject to a non-binding resolution at each AGM. The resolution to approve the 2012 Remuneration report was unanimously passed on a show of hands at the previous AGM. The proxy vote was as follows: Votes for 35,894,107 % 98.3 Votes against 621,034 % 1.7 Votes withheld 389,165 Financial statementsGovernance OverviewStrategic reportHilton Food Group plcAnnual report and financial statements 201344 Directors’ remuneration report continued Directors’ remuneration policy The policy below which reflects current practice will be subject to a binding shareholder vote at, and formally take effect from the date of, the 2014 Annual General Meeting. The policy will be subject to further binding votes every three years or sooner where any changes are made. The Committee considers that the Group’s remuneration policies should encourage a strong performance culture and emphasise long term shareholder value creation in order to be aligned with its shareholders’ interests. The following table summarises all elements of pay which make up the total remuneration opportunity for Directors, and details how each element is operated and links to the Company’s strategy. Element Basic salary Purpose and link to strategy To recruit and reward executives of a suitable calibre for the role and duties required Benefits To provide market competitive benefits to ensure the retention of employees Pension To provide adequate retirement benefits Operation Normally reviewed annually by the Committee with effect from 1 January, taking account of Company performance, individual performance, changes in responsibility and levels of increase for the broader UK employee population (or their local market where relevant). Reference is also made to median levels within relevant FTSE and industry comparators. The Committee considers the impact of any basic salary increase on the total remuneration package. The Company typically provides: – Company car and fuel; – Private healthcare; and – Other ancillary benefits, including relocation expenses (as required). Employer contributions are made to money purchase pension schemes at the rates set out in Executive Directors’ service contracts. In certain circumstances a salary supplement may be paid in lieu of such pension contributions. Annual bonus To encourage and reward delivery of the Company’s operational objectives The annual bonus scheme for Executive Directors is based on performance against the following metrics: Maximum opportunity There is no prescribed maximum annual increase. The Committee is guided by the general increase for the broader UK employee population (or their local market where relevant) but on occasions may need to recognise, for example, development in roles assigned, change in responsibility, and/ or specific retention issues. Value of benefits is based on the cost to the Company and is not pre- determined. Up to 15% of basic salary for R. Watson, P. Heffer and N. Majewski and for T. Bergman up to 24% of basic salary, holiday allowance and bonus (in compliance with a legacy arrangement). Up to 125% of basic salary. – Financial element based on achieving financial targets including the Group net income level adjusted for exceptional items; and – Non-financial element based on individual Executive Director achievement against personal and strategic targets. There are no deferred elements. Any bonus paid is subject to claw-back in circumstances of exceptional misstatement or misconduct. Hilton Food Group plcAnnual report and financial statements 2013 Element Long term incentives Purpose and link to strategy To encourage and reward delivery of the Company’s strategic objectives and provide alignment with its shareholders’ interests through the use of share option schemes All employee share schemes To encourage employee share ownership and thereby increase their alignment with shareholders Non- Executive Director fees To attract and retain a high-calibre Non-Executive Chairman and Non-Executive Directors by offering a market competitive fee level 45 Maximum opportunity 100% of salary for all Executive Directors, but in exceptional circumstances such as recruitment or retention, the limit may be increased to 200% of salary. The same ESOS maximum opportunity as for LTIP above. Maximum savings up to the UK statutory limit. As for the Executive Directors, there is no prescribed maximum annual increase. The Committee is guided by the general increase for the broader UK employee population but on occasions may need to recognise, for example, change in responsibility, and/or time commitments. Operation Under its Long Term Incentive Plan (LTIP) Hilton makes an annual award of conditional shares or nil cost options. Awards are granted subject to continued employment and satisfaction of challenging performance conditions measured over three years to be satisfied by the issue of new shares or transfer of existing shares. An Employee Benefit Trust has been set up in connection with this plan. Awards granted under the current policy are subject to the achievement of EPS performance targets determined at the date of grant with 25% vesting at threshold performance. Awards are subject to claw-back for three years following vesting in circumstances of material misstatement, error or misconduct. There are no plans to grant further options under Hilton’s Executive Share Option Scheme (ESOS) in the foreseeable future although the ability to do so is retained as an alternative to LTIP awards. Any grants would be subject to performance conditions determined prior to grant. All employees are eligible to join Hilton’s Sharesave Scheme (HMRC approved for the UK and Ireland) and make regular savings for a three year period following which they have six months to exercise the options granted. No performance conditions attach to options granted under the Scheme. The Non-Executive Directors receive the fees set out in their letters of appointment. A base fee is augmented for Committee Chairmanship or membership to take into account the additional time commitment and responsibilities associated with those committees. Non-Executive Director remuneration is determined by the Non-Executive Chairman and the Executive Directors. The Non-Executive Chairman’s remuneration is determined by the Remuneration Committee. Notes 1. The remuneration policy for the Executive Directors is designed with regard to the policy for employees across the Group as a whole. For example, the Committee takes into account the general base salary increase for the broader UK employee population when determining the annual salary review for the Executive Directors. There are some differences in the structure of the remuneration policy for the Executive Directors and other senior employees, which the Remuneration Committee believes are necessary to reflect the different levels of responsibility of employees across the Company. The key differences in remuneration policy between the Executive Directors and employees across the Group are the increased emphasis on performance related pay and the inclusion of a share based long term incentive plan for Executive Directors. There is a lower aggregate incentive quantum at below executive level with levels driven by market comparatives and the impact of the role. Long term incentives are not provided outside of the most senior executives as they are reserved for those anticipated as having the greatest potential to influence Group levels of performance. 2. The choice of the annual bonus financial element based on net income metric aligns the bonus for a given year to the overall financial performance for that year. Threshold performance is at the previous year net income thereafter on a sliding scale with the maximum bonus paid at a stretching margin above current year budgeted net income. 3. The long term incentive EPS metric was chosen as it aligns the incentive with long term returns to shareholders. 4. Long term incentive and sharesave schemes are operated in accordance with their respective Scheme and other rules under which the Committee has some discretion relating to their administration which is consistent with market practice. Under the LTIP such discretion covers: – treatment of awards in the event of good leavers (including determination of good leaver status), death and intervening events (including variations in capital and change of control) which address vesting date, exercise period and reduction in number of vesting options; – in exceptional circumstances such as recruitment or retention the grant limit may be increased to 200% of salary; – minor alterations to benefit the plan administration, to take account of a change in legislation or to obtain or maintain favourable tax, exchange control or regulatory treatment; and – where an event has occurred such that it would be appropriate to amend the performance condition so long as the altered performance condition is not materially less difficult to satisfy. Financial statementsGovernance OverviewStrategic reportHilton Food Group plcAnnual report and financial statements 201346 Directors’ remuneration report continued Other policy information Element Non-UK based Directors and foreign currency translation Share ownership Approach to recruitment Payment for loss of office Consideration of shareholder views Consideration of employment conditions elsewhere in the Group Description Directors may be employed who are based outside of the UK and therefore subject to the employment laws and accepted practice for that country which may be different to those in the UK. The Committee will ensure that any future overseas based Directors are remunerated on an equivalent basis as in the UK albeit that it may be necessary to satisfy local statutory requirements. Remuneration to T. Bergman is paid in Euro which, for disclosure purposes, is translated into Sterling at the average exchange rate for the relevant year. The Directors’ current shareholdings total 10.69% of the Company’s shares. The Committee considers these shareholdings to be significant and is sufficient to align their interests to the longer term performance of the Company such that no additional guideline is necessary. The remuneration package for a new Executive Director would be set in accordance with the terms of the Company’s approved remuneration policy in force at the time of appointment. For the appointment of a new Chairman or Non-Executive Director, the fee arrangement would be set in accordance with the approved remuneration policy in force at that time. The salary for a new Executive Director may be set below the normal market rate, with phased increases over the first few years as the Executive Director gains experience in their new role. The Committee may offer additional cash and/or share-based elements when it considers these to be in the best interests of the Company and its shareholders. Such payments would reflect and be limited to remuneration relinquished when leaving the former employer and would reflect (as far as possible) the nature and time horizons attaching to that remuneration and the impact of any performance conditions. Shareholders will be informed of any such payments at the time of appointment. For an internal Executive Director appointment, any variable pay element awarded in respect of the prior role will be allowed to pay out according to its terms. In addition, any other ongoing remuneration obligations existing prior to appointment may continue. For external and internal Executive Director appointments, the Committee may agree that the Company will meet certain relocation expenses where appropriate. Payments for loss of office are made in accordance with the terms of the Directors’ service contracts as below. In accordance with its terms of reference the Committee ensures that contractual terms on termination, and any payments made, are fair to the individual, and the Company, that failure is not rewarded and that the duty to mitigate loss is fully recognised. The Committee is always interested in shareholder views and is committed to an open dialogue. All feedback is considered when making policy decisions. The Committee will seek to engage with major shareholders on any proposed significant changes to its remuneration policies. The Committee takes into account the general employment reward packages of employees across the Group when setting policy for Executive Director remuneration. Employees have not previously been actively consulted on Director remuneration policies but this may be considered in future where appropriate. Hilton Food Group plcAnnual report and financial statements 201347 Director service contract and other relevant information Provision Term Re-election at AGM Notice period Termination payment / payments in lieu of notice Remuneration entitlements Change of control Executive Directors All appointed 24 April 2007 with no fixed term Every 3 years Non-Executive Directors Sir David Naish and Chris Marsh 3 years from 27 March 2013 Colin Smith 3 years from 1 October 2013 Every 3 years 12 months for both Company and Director 6 months for both Company and Director Up to 12 months’ salary in lieu of notice. None If a claim is made against the Company in relation to a termination (e.g. for unfair dismissal), the Committee retains the right to make an appropriate payment in settlement of such claims as considered in the best interests of the Company. Additional payments in connection with any statutory entitlements (e.g. in relation to redundancy) may be made as required. On termination no bonus is payable and outstanding share awards will lapse unless the Committee determines good leaver circumstances apply. In good leaver circumstances and subject to performance conditions a pro-rata bonus may be payable at the Company’s discretion. Outstanding share awards may vest subject to time pro-rating and the performance conditions being satisfied. There are no enhanced terms in relation to a change of control. None There are no enhanced terms in relation to a change of control Legacy arrangements For the avoidance of doubt, in approving this policy report, authority is given to the Company to honour any commitments entered into with current or former Directors (such as the payment of a pension or the unwinding of legacy share schemes) that have been disclosed to shareholders in previous remuneration reports. Details of any payments to former Directors will be set out in the annual remuneration report as they arise. Remuneration paid to T. Bergman is subject to Dutch laws and accepted practices. The Dutch Minimum Wages and the Minimum Holiday Allowance Act provides that an employer is obliged to pay a holiday allowance equal to a certain percentage, currently 8%, of the employee’s basic salary. In the UK such holiday allowance is generally included within the employee basic salary. Additionally the terms of the Dutch industry specific pension scheme, to which Mr Bergman has belonged since before the acquisition by Hilton of the Dutch business, currently stipulate that the pension percentage contribution is applied to basic salary, holiday allowance and bonus although this may be subject to change in the future. Financial statementsGovernance OverviewStrategic reportHilton Food Group plcAnnual report and financial statements 201348 Directors’ remuneration report continued Illustration of future application of remuneration policy The chart below illustrates 2014 Executive Directors’ remuneration at different levels of performance under the remuneration policy. 2014 Director remuneration illustration £’000 473 100% 61% 36% 381 27% 12% 774 36% 28% 1,318 27% 12% 621 36% 28% 1,057 462 100% 59% 34% 372 31% 10% 788 41% 25% 1,344 27% 12% 612 36% 29% 1,048 100% 61% 36% 100% 61% 35% 0 200 400 600 800 1,000 1,200 1,400 R. Watson P. Heffer T. Bergman N. Majewski Minimum On Target Maximum Minimum On Target Maximum Minimum On Target Maximum Minimum On Target Maximum Fixed One year targets Multiple year targets Notes 1. Fixed elements of pay comprise salary and fees, benefits and pension. For T. Bergman the holiday allowance is included in the fixed element but the bonus related pension is excluded from the fixed element and is included in the one year target accordingly. Salary and fees include known increases, benefits are included at 2013 levels and pension is calculated at the approved percentage rates. 2. One year targets represent the annual bonus and for T. Bergman the related pension. The minimum scenario assumes no bonus on the basis that threshold is not reached, the on target scenario assumes an aggregate 55% of salary bonus, and the maximum scenario assumes the full 125% bonus. 3. Multiple year targets comprise long term incentives. The minimum scenario assumes that threshold performance is not reached with no awards vesting, the on target scenario is at threshold performance with 25% of the awards vesting and the maximum scenario reflects the maximum performance with 100% of the awards vesting. Hilton Food Group plcAnnual report and financial statements 201349 Annual report on remuneration This section is subject to audit. Single total figure table of remuneration The remuneration of individual Directors is set out below. Executive Directors R. Watson P. Heffer T. Bergman N. Majewski Non-Executive Directors D. Naish C. Marsh C. Smith Total Executive Directors R. Watson C. Patten P. Heffer T. Bergman N. Majewski Non-Executive Directors D. Naish C. Marsh C. Smith Total Notes 1. Salary and fees Salary and fees £’000 Benefits £’000 Annual bonus £’000 Long term incentive £’000 Pension £’000 Total £’000 52 weeks to 29 December 2013 363 290 344 290 90 50 50 1,477 41 35 21 27 – – – 124 151 121 133 121 – – – 526 – – – – – – – – 55 44 108 25 – – – 232 610 490 606 463 90 50 50 2,359 Salary and fees £’000 Benefits £’000 Annual bonus £’000 Long term incentive £’000 Pension £’000 Total £’000 52 weeks to 30 December 2012 353 423 282 313 282 80 45 45 1,823 41 40 35 21 25 – – – 162 35 – 28 29 28 – – – 120 140 8 112 121 112 – – – 493 24 10 20 78 11 – – – 143 593 481 477 562 458 80 45 45 2,741 2013 salaries reflect a 3% increase on 2012. The salary disclosed in respect of T. Bergman includes an 8% holiday allowance. 2. Annual bonus Under the 2013 annual bonus financial element formula, threshold performance was 2012 net income £17.6m, achievement of which earned a 21.5% of salary bonus. Thereafter the bonus was calculated on a sliding scale including a 41% of salary bonus for achieving the 2013 budgeted net income level of £18.8m up to a maximum 80% of salary bonus for achieving the stretch target of 115% of 2013 budgeted net income being £21.6m. A non-financial element bonus of up to 20% was available aggregating to a 100% maximum bonus opportunity. Actual 2013 net income was £17.8m or 94.7% of 2013 budgeted net income resulting in a financial element bonus of 26.6% of salary. The Committee considered that excellent strategic progress had been made in difficult trading conditions and accordingly awarded a 15% of salary non-financial metric bonus out of a potential 20% of salary. Therefore a total bonus of 41.6% of salary is payable for the year to each Executive Director. In 2012 the threshold net income was not achieved and so no financial element bonus was paid. 10% of salary was paid to each Executive Director in respect of the non-financial metric in view of considerable progress made. 3. Long term incentive Long term incentives comprise the number of share options under the Company’s share plans where the achievement of performance targets ended in the year multiplied by the difference between the share price on the date of vesting and the exercise price. There were no long term incentive awards that were due to vest dependent on a performance period ending in 2013. In 2012 share options under the Executive Share Option Scheme achieved the EPS performance hurdle of RPI plus 3% per year resulting in 100% vesting. 4. Pension As disclosed in Hilton’s 2012 Annual Report it was decided that contributions would be increased for 2013 to 15% of basic salary for R. Watson, P. Heffer and N. Majewski from 7%; contributions for T. Bergman which are based on basic salary, holiday allowance and bonus were increased from 20% to 24%. 5. Payments to past directors No payments were made to former directors in 2013 or 2012. 6. Payments for loss of office No payments for loss of office were made during 2013. In 2012 Colin Patten received a termination payment of £282,000 comprising one year’s salary in line with his service contract which is included in his salary amount as above. There are no additional payments due to Colin Patten. Financial statementsGovernance OverviewStrategic reportHilton Food Group plcAnnual report and financial statements 201350 Directors’ remuneration report continued Director shareholding and share interests Details of Director shareholdings and changes in outstanding share awards were as follows: Director R. Watson P. Heffer T. Bergman N. Majewski D. Naish C. Marsh C. Smith Type Shares Share options Share options Share options Total share options Nil cost options Nil cost options Total nil cost options Shares Share options Share options Share options Total share options Nil cost options Nil cost options Total nil cost options Shares Share options Share options Share options Total share options Nil cost options Nil cost options Total nil cost options Shares Share options Share options Share options Total share options Nil cost options Nil cost options Total nil cost options Shares Shares Shares At 30 December 2012 3,266,380 150,376 180,258 130,610 461,244 141,585 – 141,585 4,181,030 120,301 144,206 104,488 368,995 113,268 – 113,268 328,333 120,301 154,751 113,610 388,662 119,437 – 119,437 19,863 120,301 144,206 104,488 368,995 113,268 – 113,268 55,000 30,000 50,000 Granted (note 4) Exercised – – – – – 102,288 102,288 (150,376) – – (150,376) – – – – – – – – 81,830 81,830 – – – – – 88,374 88,374 – – – – – 81,830 81,830 – – – – – – – (120,301) (154,751) – (275,052) – – – – (144,206) – (144,206) – – – At 29 December 2013 3,016,380 – 180,258 130,610 310,868 141,585 102,288 243,873 4,181,030 120,301 144,206 104,488 368,995 113,268 81,830 195,098 328,333 – – 113,610 113,610 119,437 88,374 207,811 57,599 120,301 – 104,488 224,789 113,268 81,830 195,098 55,000 30,000 30,000 Exercise price (pence) Earliest exercise date Latest exercise date 199.50 174.75 246.00 12.05.11 01.05.12 10.05.13 12.05.18 01.05.19 10.05.20 nil nil 26.06.15 08.05.16 26.06.22 08.05.23 199.50 174.75 246.00 12.05.11 01.05.12 10.05.13 12.05.18 01.05.19 10.05.20 Notes 1 2 2 2 3(a) 3(b) 1 2 2 2 nil nil 26.06.15 08.05.16 26.06.22 08.05.23 3(a) 3(b) 199.50 174.75 246.00 12.05.11 01.05.12 10.05.13 12.05.18 01.05.19 10.05.20 1 2 2 2 nil nil 26.06.15 08.05.16 26.06.22 08.05.23 3(a) 3(b) 199.50 174.75 246.00 12.05.11 01.05.12 10.05.13 12.05.18 01.05.19 10.05.20 nil nil 26.06.15 08.05.16 26.06.22 08.05.23 1 2 2 2 3(a) 3(b) 1 1 Notes 1. There is no requirement for Directors to hold shares in the Company. All shares are beneficially owned with the exception of 1,280,917 shares held by various family trusts of which R. Watson is a trustee. Additionally 750,000 shares held by R. Watson have been pledged as security on a personal loan. There have been no other changes in the interests of Directors between 29 December 2013 and the date of this report. 2. Executive Share Option Scheme awards which have vested. 3. Nil cost options granted under the Long Term Incentive Plan which are subject to a performance condition of compound growth in the Group’s earnings per share over three years. a) Awards vest on a sliding scale between 25% for 6% EPS compound annual growth and 100% for at least 14.5% EPS compound annual growth. b) Awards vest on a sliding scale between 25% for 5% EPS compound annual growth and 100% for at least 10% EPS compound annual growth. 4. Face value of the awards granted in the year were R. Watson £363,122, P. Heffer £290,498, T. Bergman £313,726 and N. Majewski £290,498. Hilton Food Group plcAnnual report and financial statements 201351 Further information Statement of implementation of remuneration policy in the 2014 financial year Base salaries For 2014 salaries for Executive Directors have increased by 3.5% and are disclosed below. R. Watson P. Heffer T. Bergman (both years include holiday allowance and are translated at the 2013 average exchange rate) N. Majewski 2013 £’000 363 290 344 290 2014 £’000 376 300 356 300 Annual bonus The maximum annual bonus in 2014 will be 125% of salary for all Executive Directors. The bonus will be payable subject to stretching targets around net income (105% of salary) and personal and strategic targets (20% of salary). As financial targets are set with reference to the budget, they are therefore considered commercially sensitive. The Committee will disclose targets on a retrospective basis. 2014 long term incentive awards The Committee will make a decision on any 2014 grant of nil cost awards and their related performance conditions following the Annual report approval date. Details of new grant and performance conditions will be published via a Regulatory Information Service. TSR performance graph The graph below shows the Total Shareholder Return performance (TSR) (share price movements plus reinvested dividends) of the Company compared against the FTSE Small Cap Index covering the five years 2009 to 2013. The FTSE Small Cap Index is, in the opinion of the Directors, the most appropriate index against which the TSR of the Company should be measured. 400 300 200 100 2009 2010 2011 2012 2013 Hilton Food Group – Total Return Index FTSE All Small – Total Return Index Chief Executive Officer remuneration five year trend Total remuneration (£’000) Annual bonus (as a percentage of the maximum) Long term incentive vesting (as a percentage of the maximum) 2009 584 85% n/a 2010 644 63% 2011 730 53% 2012 593 10% 100% 100% 100% 2013 610 42% n/a Notes There were no long term incentive awards that were due to vest dependent on a performance period ending in 2009 or 2013. Financial statementsGovernance OverviewStrategic reportHilton Food Group plcAnnual report and financial statements 2013 52 Directors’ remuneration report continued Chief Executive Officer remuneration percentage change 2013 percentage increase over 2012 Salary Benefits Annual bonus CEO 3% 0% 331% Company average 3% n/a n/a Notes The majority of employees do not receive benefits or annual bonus and so there is no meaningful data. An alternative comparator group is senior management for whom the percentage changes for salary, benefits and annual bonus were 3%, 0% and 3% respectively. Relative importance of spend on pay The following table sets out for the comparison total spend on pay with dividends. Staff costs (note 8 to the financial statements) Dividends payable 2013 £’000 72,141 9,201 2012 £’000 66,727 8,548 % change 8% 8% Notes Dividends payable comprises any interim dividends paid in respect of the year plus the final dividend proposed for the year but not yet paid. On behalf of the Board Chris Marsh Chairman of the Remuneration Committee 26 March 2014 Hilton Food Group plcAnnual report and financial statements 2013Statements of Directors’ responsibilities 53 Responsibility statement of the Directors in respect of the Annual report and financial statements Each of the Directors whose names and functions are set out on pages 32 and 33, confirm that to the best of their knowledge and belief: – the Group and parent company financial statements, prepared in accordance with applicable UK law and in conformity with IFRS, as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit of the Group and the Company; and – the management reports, which comprise the Strategic report and the Directors’ report, include a fair review of the development and performance of the business and the position of the Group and the Company, together with a description of the principal risks and uncertainties they face. This responsibility statement was approved by the Board of Directors on 26 March 2014 and is signed on its behalf by: Robert Watson obe Chief Executive Nigel Majewski Finance Director Directors’ responsibilities for the preparation of the Annual report and financial statements The Directors are responsible for preparing the Annual report and the financial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have prepared the Group and parent company financial statements in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union. Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and the Group and the profit or loss of the Group for that period. In preparing these financial statements the Directors are required to: – select suitable accounting policies and then apply them consistently; – make judgements and accounting estimates that are reasonable and prudent; – state whether applicable IFRS as adopted by the European Union have been followed, subject to any material departures disclosed and explained in the financial statements; and – prepare the financial statements on the going concern basis, unless it is inappropriate to presume that the Group will continue in business. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and which disclose with reasonable accuracy at any time the financial position of the Company and the Group and to enable them to ensure that the financial statements and the Remuneration report comply with the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the Company and the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors are responsible for the maintenance and integrity of the Company’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. The Directors consider that the Annual report and financial statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Group’s performance, business model and strategy. Financial statementsGovernance OverviewStrategic reportHilton Food Group plcAnnual report and financial statements 201354 Independent auditors’ report to the members of Hilton Food Group plc Report on the financial statements Our opinion In our opinion: – The financial statements, defined below, give a true and fair view of the state of the Group’s and of the Company’s affairs as at 29 December 2013 and of the Group’s profit and of the Group’s and Company’s cash flows for the year then ended; – The Group financial statements have been properly prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union; What an audit of financial statements involves We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) (ISAs (UK & Ireland)). An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: – whether the accounting policies are appropriate to the Group’s and Company’s circumstances and have been consistently applied and adequately disclosed; – the reasonableness of significant accounting estimates made – The Parent Company financial statements have been properly by the Directors; and prepared in accordance with IFRSs as adopted by the European Union and as applied in accordance with the provisions of the Companies Act 2006; and – The financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation. This opinion is to be read in the context of what we say below. What we have audited The Group financial statements and Parent Company financial statements (the “financial statements”), which are prepared by Hilton Food Group plc, comprise: – the Group and Company balance sheets as at 29 December 2013; – the Group income statement and statement of comprehensive income for the year then ended; – the Group and Company statements of changes in equity and statements of cash flows for the year then ended; and – the notes to the financial statements, which include a summary of significant accounting policies and other explanatory information. The financial reporting framework that has been applied in their preparation comprises applicable law and IFRSs as adopted by the European Union and, as regards the Parent Company, as applied in accordance with the provisions of the Companies Act 2006. – the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the Annual Report and financial statements (the “Annual Report”) to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. Overview of our audit approach Materiality We set certain thresholds for materiality. These helped us to  determine the nature, timing and extent of our audit procedures and to evaluate the effect of misstatements, both individually and on the financial statements as a whole. Based on our professional judgement, we determined materiality for the Group financial statements as a whole to be £1.3 million which is approximately 5% of pre-tax profits. Although our audit was designed to identify material misstatements, we agreed with the Audit Committee that we would report to them misstatements identified during our audit above £62,000 as well as misstatements below that amount that, in our view, warranted reporting for qualitative reasons. Hilton Food Group plcAnnual report and financial statements 201355 Overview of the scope of our audit The Group is structured as a parent company with 11 subsidiary undertakings, of which six are trading subsidiaries, and a joint venture company. The Group financial statements are a consolidation of these entities, which, together, comprise the Group’s operating businesses, centralised functions and intermediary holding companies. In establishing the overall approach to the Group audit, we determined the type of work that needed to be performed at these entities by us, as the Group engagement team, or component auditors within other PwC network firms and other firms operating under our instruction. Where the work was performed by component auditors, we determined the level of involvement we needed to have in the audit work at those entities to be able to conclude whether sufficient appropriate audit evidence had been obtained as a basis for our opinion on the Group financial statements as a whole. We determined that all 11 companies within the Group required an audit of their complete financial information. Areas of particular audit focus In preparing the financial statements, the Directors made a number of subjective judgements, for example in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain. We primarily focused our work in these areas by assessing the Directors’ judgements against available evidence, forming our own judgements, and evaluating the disclosures in the financial statements. In our audit, we tested and examined information, using sampling and other auditing techniques, to the extent we considered necessary to provide a reasonable basis for us to draw conclusions. We obtained audit evidence through testing the effectiveness of controls, substantive procedures or a combination of both. We considered the following areas to be those that required particular focus in the current year. This is not a complete list of all risks or areas of audit focus identified by our audit. We discussed these areas of focus with the Audit Committee. Their report on those matters that they considered to be significant issues in relation to the financial statements is included within the risk management and internal controls section of the Report of the Audit Committee on page 39. Fraud in revenue recognition ISAs (UK & Ireland) presume there is a risk of fraud in revenue recognition because of the pressure management may feel to achieve the planned results. We focused on the amount and timing of the recognition of revenue, particularly where the contractual customer terms provide for “cost plus” pricing or discounts, which are calculated by management. We tested revenue by agreeing it to supporting documentation, including customer contracts, discounts and incentives, and to cash receipts. We also tested journal entries posted to revenue accounts by identifying and challenging unusual or irregular items. Risk of management override of internal controls ISAs (UK & Ireland) require that we consider this. We assessed the overall control environment of the Group, including the arrangements for staff to “whistle-blow” inappropriate actions, and interviewed senior management and the Group’s internal audit function. We examined the significant accounting estimates and judgements relevant to the financial statements for evidence of bias by the Directors that may represent a risk of material misstatement due to fraud. In particular, we challenged the estimates in respect of the cost plus revenue adjustments and customer rebates. We also tested journal entries. Going Concern Under the Listing Rules we are required to review the Directors’ statement, set out on page 21, in relation to going concern. We have nothing to report having performed our review. As noted in the Directors’ statement, the Directors have concluded that it is appropriate to prepare the Group’s and Company’s financial statements using the going concern basis of accounting. The going concern basis presumes that the Group and Company have adequate resources to remain in operation, and that the Directors intend them to do so, for at least one year from the date the financial statements were signed. As part of our audit we have concluded that the Directors’ use of the going concern basis is appropriate. However, because not all future events or conditions can be predicted, these statements are not a guarantee as to the Group’s and the Company’s ability to continue as a going concern. Financial statementsGovernance OverviewStrategic reportHilton Food Group plcAnnual report and financial statements 201356 Independent auditors’ report to the members of Hilton Food Group plc continued Opinions on other matters prescribed by the Companies Act 2006 In our opinion: – the information given in the Strategic report and the Directors’ report for the financial year for which the financial statements are prepared is consistent with the financial statements; – the part of the Directors’ remuneration report to be audited has been properly prepared in accordance with the Companies Act 2006; and Corporate Governance Statement Under the Companies Act 2006, we are required to report to you if, in our opinion a corporate governance statement has not been prepared by the Company. We have no exceptions to report arising from this responsibility. Under the Listing Rules we are required to review the part of the Corporate Governance Statement relating to the Company’s compliance with nine provisions of the UK Corporate Governance Code (the “Code”). We have nothing to report having performed our review. – the information given in the Corporate governance statement set out on pages 36 to 38 in the Annual Report with respect to internal control and risk management systems and about share capital structures is consistent with the financial statements. Other matters on which we are required to report by exception Adequacy of accounting records and information and explanations received Under the Companies Act 2006 we are required to report to you if, in our opinion: – we have not received all the information and explanations we require for our audit; or – adequate accounting records have not been kept by the Company, or returns adequate for our audit have not been received from branches not visited by us; or – the Company financial statements and the part of the Directors’ remuneration report to be audited are not in agreement with the accounting records and returns. We have no exceptions to report arising from this responsibility. Directors’ remuneration Under the Companies Act 2006, we are required to report to you if, in our opinion, certain disclosures of Directors’ remuneration specified by law have not been made. We have no exceptions to report arising from this responsibility. On page 53 of the Annual Report, as required by the Code Provision C.1.1, the directors state that they consider the Annual Report taken as a whole to be fair, balanced and understandable and provides the information necessary for members to assess the Group’s performance, business model and strategy. On page 39, as required by C.3.8 of the Code, the Audit Committee has set out the significant issues that it considered in relation to the financial statements, and how they were addressed. Under ISAs (UK & Ireland) we are required to report to you if, in our opinion: – the statement given by the Directors is materially inconsistent with our knowledge of the Group acquired in the course of performing our audit; or – the section of the Annual Report describing the work of the Audit Committee does not appropriately address matters communicated by us to the Audit Committee. We have no exceptions to report arising from this responsibility. Other information in the Annual Report Under ISAs (UK & Ireland), we are required to report to you if, in our opinion, information in the Annual Report is: – materially inconsistent with the information in the audited financial statements; or – apparently materially incorrect based on, or materially inconsistent with, our knowledge of the Group and Parent Company acquired in the course of performing our audit; or – is otherwise misleading. We have no exceptions to report arising from this responsibility. Hilton Food Group plcAnnual report and financial statements 201357 Responsibilities for the financial statements and the audit Our responsibilities and those of the Directors As explained more fully in the Directors’ responsibilities statement on page 53, the Directors are responsible for the preparation of the Group and Company financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the Group and Parent Company financial statements in accordance with applicable law and ISAs (UK & Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. This report, including the opinions, has been prepared for and only for the Company’s members as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. Martin Pitt (Senior Statutory Auditor) for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors Belfast 26 March 2014 The maintenance and integrity of the Hilton Food Group plc website is the responsibility of the Directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. Financial statementsGovernance OverviewStrategic reportHilton Food Group plcAnnual report and financial statements 201358 Hilton Food Group plcAnnual report and financial statements 201359 Financial statements Consolidated income statement 60 Consolidated statement of comprehensive income Consolidated balance sheet Consolidated statement of changes in equity Consolidated cash flow statement Notes to the financial statements Registered office and advisors 60 61 62 63 64 85 Financial statementsGovernance OverviewStrategic reportHilton Food Group plcAnnual report and financial statements 201360 Consolidated income statement Continuing operations Revenue Cost of sales Gross profit Distribution costs Administrative expenses Share of profit in joint venture Operating profit Finance income Finance costs Finance costs – net Profit before income tax Income tax expense Profit for the year Attributable to: Owners of the parent Non-controlling interests Earnings per share attributable to owners of the parent during the year Basic (pence) Diluted (pence) Notes 5 9 9 9 10 11 11 2013 52 weeks £’000 2012 52 weeks £’000 1,124,780  (993,257) 131,523  (10,498) (95,715) 464  25,774  118  (1,020) (902) 24,872  (5,512) 19,360  17,828  1,532  19,360  25.0  24.8  1,031,004  (904,755) 126,249  (9,149) (91,133) – 25,967  199  (1,454) (1,255) 24,712  (5,807) 18,905  17,584  1,321  18,905  24.9  24.7  Consolidated statement of comprehensive income Profit for the year Other comprehensive income Currency translation differences Other comprehensive income for the year net of tax Total comprehensive income for the year Total comprehensive income attributable to: Owners of the parent Non-controlling interests The notes on pages 64 to 84 are an integral part of these consolidated financial statements. 2013 52 weeks £’000 19,360  390  390  19,750  18,151  1,599  19,750  2012 52 weeks £’000 18,905  (275) (275) 18,630  17,392  1,238  18,630  Hilton Food Group plcAnnual report and financial statements 2013Consolidated balance sheet Assets Non-current assets Property, plant and equipment Intangible assets Investments Deferred income tax assets Current assets Inventories Trade and other receivables Current income tax assets Cash and cash equivalents Total assets Equity Equity attributable to owners of the parent Ordinary shares Share premium Employee share schemes reserve Foreign currency translation reserve Retained earnings Reverse acquisition reserve Merger reserve Non-controlling interests Total equity Liabilities Non-current liabilities Borrowings Deferred income tax liabilities Current liabilities Borrowings Trade and other payables Total liabilities Total equity and liabilities Notes 2013 £’000 13 14 15 21 16 17 18 22 19 21 19 20 58,876  2,660  405  1,313  63,254  23,837  124,356  745  34,642  183,580  246,834  7,216  5,885  857  2,422  63,989  80,369  (31,700) 919  49,588  4,670  54,258  18,616  1,459  20,075  11,104  161,397  172,501  192,576  246,834  Group 2012 £’000 56,162  1,857  –  1,111  59,130  21,885  107,811  699  31,428  161,823  220,953  7,087  2,562  1,238  2,099  54,932  67,918  (31,700) 919  37,137  3,835  40,972  25,133  1,579  26,712  11,497  141,772  153,269  179,981  220,953  Financial statements 61 2013 £’000 –  –  102,985  –  102,985  –  88  53  189  330  103,315  7,216  5,885  –  –  11,922  25,023  –  71,019  96,042  –  96,042  –  –  –  –  7,273  7,273  7,273  103,315  Company 2012 £’000 –  –  102,985  –  102,985  –  115  87  30  232  103,217  7,087  2,562  –  –  11,148  20,797  –  71,019  91,816  –  91,816  –  –  –  –  11,401  11,401  11,401  103,217  The notes on pages 64 to 84 are an integral part of these consolidated financial statements. The financial statements on pages 59 to 84 were approved by the Board on 26 March 2014 and were signed on its behalf by: R. Watson obe Director Hilton Food Group plc – Registered number: 06165540 N. Majewski Director Financial statementsGovernance OverviewStrategic reportHilton Food Group plcAnnual report and financial statements 201362 Consolidated statement of changes in equity Group Balance at 2 January 2012 Profit for the year Other comprehensive income Currency translation differences Total comprehensive income for the year Issue of new shares Adjustment in respect of employee share schemes Tax on employee share schemes Dividends paid Total transactions with owners Balance at 30 December 2012 Profit for the year Other comprehensive income Currency translation differences Total comprehensive income for the year Issue of new shares Adjustment in respect of employee share schemes Tax on employee share schemes Dividends paid Total transactions with owners Balance at 29 December 2013 Company Balance at 2 January 2012 Profit for the year Total comprehensive income for the year Issue of new shares Adjustment in respect of employee share schemes Tax on employee share schemes Dividends paid Total transactions with owners Balance at 30 December 2012 Profit for the year Total comprehensive income for the year Issue of new shares Adjustment in respect of employee share schemes Tax on employee share schemes Dividends paid Total transactions with owners Balance at 29 December 2013 Attributable to owners of the parent Notes Share capital £’000 6,985  –  Share premium £’000 372  –  Employee share schemes reserve £’000 1,558  –  Foreign currency translation Retained reserve earnings £’000 £’000 2,291  45,392  17,584  –  Reverse acquisition reserve £’000 (31,700) –  Merger reserve £’000 919  –  Non- controlling Total interests equity £’000 £’000 3,452  29,269  18,905  1,321  Total £’000 25,817  17,584  –  –  –  102  –  1,678  –  –  –  (192) (192) –  –  17,584  –  –  –  –  –  –  –  102  7,087  453  59  –  2,190  2,562  (168) (152) –  (320) 1,238  –  –  –  –  –  –  (8,044) (8,044) 2,099  54,932  –  –  –  –  (31,700) –  –  –  –  –  –  –  919  (192) (83) (275) 17,392  1,780  1,238  –  18,630  1,780  285  (93) (8,044) (6,072) 37,137  –  –  (855) (855) 285  (93) (8,899) (6,927) 3,835  40,972  –  –  –  –  –  129  –  2,498  –  –  –  129  7,216  682  143  –  3,323  5,885  6,985  –  372  –  –  102  –  1,678  – –  –  102  7,087  453  59  –  2,190  2,562  –  –  –  129  –  2,498  –  –  –  129  7,216  682  143  –  3,323  5,885  –  –  –  –  –  17,828  323  323  –  –  17,828  –  –  –  –  –  –  17,828  1,532  19,360  –  –  –  323  67  390  18,151  2,627  1,599  –  19,750  2,627  (599) 218  –  (381) 857  –  –  –  –  –  –  (8,771) (8,771) 2,422  63,989  –  –  –  –  (31,700) –  –  –  –  83  361  (8,771) (5,700) 919  49,588  –  –  (764) (764) 83  361  (9,535) (6,464) 4,670  54,258  –  –  –  –  – –  –  –  –  –  –  –  –  –  –  –  –  –  –  –  –  – –  –  –  –  –  –  –  –  –  –  –  –  9,970  9,222  9,222  –  – –  (8,044) (8,044) 11,148  9,545  9,545  –  –  –  (8,771) (8,771) 11,922  –  –  –  –  – –  –  –  –  –  –  –  –  –  –  –  –  71,019  88,346  9,222  –  –  –  9,222  1,780  – –  –  –  71,019  453  59  (8,044) (5,752) 91,816  –  –  –  9,545  9,545  2,627  –  –  –  –  682  143  (8,771) (5,319) 71,019  96,042  12 12 12 12 The notes on pages 64 to 84 are an integral part of these consolidated financial statements. Hilton Food Group plcAnnual report and financial statements 2013Consolidated cash flow statement Notes 24 Cash flows from operating activities Cash generated from operations Interest paid Income tax (paid)/received Net cash generated from/(used in) operating activities Cash flows from investing activities Purchases of property, plant and equipment Proceeds from sale of property, plant and equipment Purchases of intangible assets Interest received Dividends received Net cash (used in)/generated from investing activities Cash flows from financing activities Proceeds from borrowings Repayments of borrowings Repayment of inter-company loan Issue of ordinary shares Dividends paid to owners of the parent Dividends paid to non-controlling interests Net cash used in financing activities Net increase in cash and cash equivalents Cash and cash equivalents at beginning of the year Exchange gains/(losses) on cash and cash equivalents Cash and cash equivalents at end of the year 18 2013 52 weeks £’000 41,788  (1,020) (5,515) 35,253  (17,228) 147  (1,272) 118  –  (18,235) 3,845  (11,114) –  2,627  (8,771) (764) (14,177) 2,841  31,428  373  34,642  Group 2012 52 weeks £’000 40,682  (1,454) (6,804) 32,424  (12,131) 329  (295) 199  –  (11,898) 1,230  (10,224) –  1,780  (8,044) (855) (16,113) 4,413  27,345  (330) 31,428  The notes on pages 64 to 84 are an integral part of these consolidated financial statements. 63 2013 52 weeks £’000 Company 2012 52 weeks £’000 –  (213) 115  (98) –  –  –  –  9,750  9,750  –  –  (3,349) 2,627  (8,771) –  (9,493) 159  30  –  189  –  (366) 156  (210) –  –  –  –  9,500  9,500  –  –  (3,010) 1,780  (8,044) –  (9,274) 16  14  –  30  Financial statementsGovernance OverviewStrategic reportHilton Food Group plcAnnual report and financial statements 201364 Notes to the financial statements 1 General information Hilton Food Group plc (“the Company”) and its subsidiaries (together “the Group”) is a specialist retail meat packing business supplying major international food retailers in 13 countries. The Company’s subsidiaries are listed in note 15. The Company is a public limited company incorporated and domiciled in the UK. The address of the registered office is 2–8 The Interchange, Latham Road, Huntingdon, Cambridgeshire PE29 6YE. The registered number of the Company is 06165540. The Company maintains a Premium Listing on the London Stock Exchange. The financial year represents the 52 weeks to 29 December 2013 (prior financial year 52 weeks to 30 December 2012). These consolidated financial statements were approved for issue on 26 March 2014. The Company has taken advantage of the exemption in Section 408 Companies Act 2006 not to publish its individual income statement, statement of comprehensive income and related notes. Profit for the year dealt with in the income statement of Hilton Food Group plc amounted to £9,545,000 (2012: £9,222,000). 2 Summary of significant accounting policies The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all of the years presented, unless otherwise stated. Basis of preparation The consolidated financial statements of Hilton Food Group plc have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union (IFRS), IFRIC interpretations and the Companies Act 2006 applicable to companies reporting under IFRS. The consolidated financial statements have been prepared on the going concern basis under the historical cost convention. The financial statements are presented in Sterling and all values are rounded to the nearest thousand (£’000) except when otherwise indicated. The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in note 4. Basis of consolidation These consolidated financial statements comprise the financial statements of Hilton Food Group plc (“the Company”), its subsidiaries and its share of profit in joint ventures, together, (“the Group”) drawn up to 29 December 2013. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group. A subsidiary is an entity controlled, either directly or indirectly, by the Company, where control is the power to govern the financial and operating policies of the entity. All inter-company balances and transactions, including unrealised profits arising from inter-group transactions, are eliminated on consolidation. The acquisition method of accounting is used to account for the acquisition of subsidiaries by the Group. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange. Acquisition costs are expensed as incurred. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. The excess of the cost of acquisition over the fair value of the Group’s share of the identifiable net assets acquired is recorded as goodwill. Joint ventures are all entities which the Group exercises joint control and has an interest in the net assets of that entity. Investments in joint ventures are accounted for using the equity method of accounting. Under the equity method, the investment is initially recognised at cost, and the carrying amount is increased or decreased to recognise the investor’s share of the profit or loss of the investee after the date of acquisition. The Group’s share of post-acquisition profit or loss is recognised in the income statement, and its share of post-acquisition movements in other comprehensive income is recognised in other comprehensive income with a corresponding adjustment to the carrying amount of the investment. Hilton Food Group plcAnnual report and financial statements 201365 International Financial Reporting Standards (a) New standards, amendments and interpretations effective in 2013 Amendment to IFRS 7 on financial instruments asset and liability offsetting (effective 1 January 2013). This amendment, along with the amendment to IAS 32 clarifies some of the requirements for offsetting financial assets and financial liabilities on the balance sheet. IFRS 13, ‘Fair value measurement’ (effective 1 January 2013). This standard aims to improve consistency and reduce complexity by providing a precise definition of fair value and a single source of fair value measurement and disclosure requirements for use across IFRS. There are no other IFRS or IFRIC interpretations that are effective for the first time for the financial year beginning on or after 1 January 2012 that would be expected to have a material impact on the Group or Company. (b) New standards, amendments and interpretations issued but not yet effective, are subject to EU endorsement and not early adopted IAS 27 (revised 2011) ‘Separate financial statements’ (effective 1 January 2014). This revised standard requires the effects of all transactions with non-controlling interests to be recorded in equity if there is no change in control. The standard also specifies the accounting when control is lost. IAS 28 (revised 2011) ‘Associates and joint ventures’ (effective 1 January 2014). This standard includes the requirements for joint ventures, as well as associates, to be equity accounted following the issue of IFRS 11. Amendment to IAS 32 ‘Financial instruments: Presentation on offsetting financial assets and financial liabilities’ (effective 1 January 2014). This along with the IFRS 7 amendment clarifies some of requirements for offsetting financial assets and financial liabilities on the balance sheet. IFRS 10, ‘Consolidated financial statements’ (effective 1 January 2014). This standard identifies the concept of control as the determining factor in whether an entity should be included within the consolidated financial statements. IFRS 11, ‘Joint arrangements’ (effective 1 January 2014). This standard focuses on the rights and obligations of the arrangement rather than its legal form. IFRS 12, ‘Disclosures of interests in other entities’ (effective 1 January 2014). This standard includes the disclosure requirements for all forms of interests in other entities, including joint arrangements, associates, special purpose vehicles and other off balance sheet vehicles. Amendment to IFRS 10, 11 & 12 ‘Transition guidance’ (effective 1 January 2014). The amendments clarify the Board’s intention when first issuing the transition guidance in IFRS 10. Amendment to IFRS 10, 12 and IAS 27 ‘Consolidation for investment entities’ (effective 1 January 2014). The amendments define an investment entity and introduce an exception to consolidating particular subsidiaries for investment entities. There are no other IFRS or IFRIC interpretations that are not yet effective that would be expected to have a material impact on the Group or Company. Revenue recognition Revenue comprises the fair value of the consideration received or receivable for the sale of goods in the ordinary course of the Group’s activities. Revenue is shown net of value-added tax, returns, rebates and discounts and after eliminating sales within the Group. The Group recognises revenue when the amount of revenue can be reliably measured, it is probable that future economic benefits will flow to the Group and the criteria set out in the following paragraph have been met. The Group sells meat in the wholesale market. Sales of goods are recognised when a Group entity has delivered products to the customer and there is no unfulfilled obligation that could affect the customer’s acceptance of the products. Delivery does not occur until the products have been shipped to the location specified by the customer, the risks of obsolescence and loss have been transferred to the customer, and either the customer has accepted the products in accordance with the sales contract, the acceptance provisions have lapsed, or the Group has objective evidence that all criteria for acceptance have been satisfied. Segment reporting Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker, who is responsible for allocating resources and assessing performance of operating segments, has been identified as the Group’s Executive Directors. Financial statementsGovernance OverviewStrategic reportHilton Food Group plcAnnual report and financial statements 201366 Notes to the financial statements continued 2 Summary of significant accounting policies (continued) Foreign currency translation (a) Functional and presentation currency Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (“the functional currency”). The consolidated financial statements are presented in Sterling, which is the Company’s functional and the Group’s presentation currency. (b) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement. (c) Group companies The results and financial position of all the Group entities (none of which has the currency of a hyperinflationary economy) that have a functional currency different from the presentation currency are translated into the presentation currency as follows: – assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet; – income and expenses for each income statement are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the rate on the dates of the transactions); and – all resulting currency translation differences are recognised in other comprehensive income and disclosed as a separate component of equity in a foreign currency translation reserve. When a foreign operation is partially disposed of or sold, exchange differences that were recorded in equity are recognised in the income statement as part of the gain or loss on sale. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate. Property, plant and equipment Property, plant and equipment are stated at historical cost less accumulated depreciation and any impairment in value. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. The carrying amount of the replaced part is derecognised. All other repairs and maintenance are charged to the income statement during the financial period in which they are incurred. Depreciation is calculated using the straight line method to allocate the cost of property, plant and equipment to their residual values over their estimated useful lives, as follows: Buildings – Held under finance lease Buildings – Leasehold improvements Plant and machinery Fixtures and fittings Motor vehicles Annual rate 5% 10% 14%–33% 14%–33% 25% Land is not depreciated. Assets in the course of construction are not depreciated until commissioned. The residual value and useful lives of property, plant and equipment are reviewed, and adjusted if appropriate, at each balance sheet date. An asset’s carrying value is written down to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount. These impairment losses are recognised in the income statement. Following the recognition of an impairment loss, the depreciation charge applicable to the asset is adjusted prospectively in order to systematically allocate the revised carrying amount, net of any residual value, over the remaining useful economic life. Hilton Food Group plcAnnual report and financial statements 201367 Intangible assets (a) Goodwill Goodwill on acquisitions of subsidiaries and purchase of non-controlling interests is included in ‘intangible assets’, tested annually for impairment and carried at cost less accumulated impairment losses. Goodwill represents the excess of the cost of the acquisition or purchase over the fair value of the Group’s share of the net identifiable assets of the acquired subsidiary or non-controlling interest at the date of acquisition. (b) Computer software Acquired software licences are stated at cost less accumulated amortisation and are capitalised on the basis of the costs incurred to acquire and bring to use the specific software. These costs are amortised on a straight line basis over their useful economic lives of three to seven years. Costs associated with developing or maintaining computer software programmes are recognised as an expense as incurred. (c) Product licences The costs of acquiring product licences are capitalised and amortised on a straight line basis over their expected useful economic lives of five to ten years. Investments Investments in subsidiary undertakings and joint ventures are carried at cost less provision for impairment. Impairment of non-financial assets Assets that have an indefinite useful life, for example goodwill, are not subject to amortisation and are tested annually for impairment. Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell, and value in use. For the purposes of assessing impairment, assets are grouped at the lowest level for which there are separately identifiable cash flows (cash generating units). Non-financial assets other than goodwill that have suffered impairment are reviewed for possible reversal of the impairment at each reporting date. Financial assets (a) Classification The Group classifies all of its financial assets as loans and receivables. Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for maturities greater than 12 months after the end of the reporting period. These are classified as non-current assets. The Group’s loans and receivables comprise ‘trade and other receivables’ and ‘cash and cash equivalents’ in the balance sheet. (b) Recognition and measurement Loans and receivables are recognised initially at fair value and subsequently carried at amortised cost using the effective interest method. (c) Impairment of financial assets The Group assesses at the end of each reporting period whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a “loss event”) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. For loans and receivables category, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate. The carrying amount of the asset is reduced and the amount of the loss is recognised in the consolidated income statement. Inventories Inventories are stated at the lower of cost and net realisable value. Cost is either determined on the first in first out basis or by the ‘retail method’ depending on the subsidiary. The ‘retail method’ computes cost on the basis of selling price less the appropriate trading margin. Cost comprises material costs, direct wages and other direct production costs together with a proportion of production overheads relevant to the stage of completion of work in progress and finished goods and excludes borrowing costs. Net realisable value represents the estimated selling price less costs to completion and appropriate selling and distribution costs. Provision is made, where necessary, for slow moving, obsolete and defective inventories. Financial statementsGovernance OverviewStrategic reportHilton Food Group plcAnnual report and financial statements 201368 Notes to the financial statements continued 2 Summary of significant accounting policies (continued) Trade and other receivables Trade receivables represent amounts due from customers for goods sold or services performed in the ordinary course of business. If collection is expected in one year or less they are classified as current assets. If not, they are presented as non-current assets. Trade receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method less provision for impairment. Cash and cash equivalents Cash and cash equivalents comprise cash at bank and in hand and short term deposits with an original maturity of three months or less. Bank overdrafts are shown on the balance sheet within borrowings in current liabilities. Share capital and reserves Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction, net of tax, from the proceeds. The share premium and employee share schemes reserve represents the premium on new shares issued in connection with and the fair value of share options outstanding under the Group’s share schemes respectively. The foreign currency translation reserve represents the cumulative currency differences arising on the translation of the Group’s overseas subsidiaries. The merger and reverse acquisition reserves arose during 2007 following the restructuring of the Group. Trade and other payables Trade payables represent obligations to pay for goods or services that have been acquired in the ordinary course of business from suppliers. Accounts payable are classified as current liabilities if payment is due within one year. If not, they are presented as non-current liabilities. Trade and other payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method. Borrowings All borrowings are recognised initially at fair value net of transaction costs incurred. Borrowings are subsequently stated at amortised cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognised in the income statement over the period of the borrowings using the effective interest method. Fees paid on the establishment of loan facilities are recognised as transaction costs of the loan to the extent that it is probable that some or all of the facility will be drawn down. In this case, the fee is deferred until the draw-down occurs. To the extent there is no evidence that it is probable that some or all of the facility will be drawn down, the fee is capitalised as a prepayment for liquidity services and amortised over the period of the facility to which it relates. Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date. Borrowing costs directly attributable to an acquisition, construction or production of a qualifying asset are capitalised as part of the cost of that asset. All other borrowing costs are recognised in the income statement in the period in which they are incurred. Leases Assets acquired under a lease which transfers substantially all of the risks and rewards of ownership to the Group, are capitalised as property, plant and equipment at the lower of their fair value and the present value of the minimum lease payments and are depreciated over the shorter of their useful economic lives and their lease term with any impairment being recognised in accumulated depreciation. Amounts payable under such leases (finance leases), net of transaction costs, are classified as current and non-current liabilities based on the lease payment dates. Lease payments are treated as consisting of capital and interest elements and the interest is charged to the income statement in proportion to the reducing capital element outstanding. Leases where the lessor retains substantially all of the risks and rewards of ownership are classified as operating leases. The annual rentals under operating leases are charged to the income statement as incurred on a straight line basis over the period of the lease. Hilton Food Group plcAnnual report and financial statements 201369 Current and deferred income tax The tax expense for the period comprises current and deferred tax. Tax is recognised in the income statement, except to the extent that it relates to items recognised in other comprehensive income or directly in equity. In this case the tax is also recognised in other comprehensive income or directly in equity, respectively. The current income tax charge represents the expected tax payable or recoverable on the taxable profit for the year using tax laws enacted or substantively enacted at the balance sheet date. Deferred income tax is recognised, using the liability method, on all temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, the deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. Deferred income tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. Deferred income tax is provided on temporary differences arising on investments in subsidiaries except where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income tax assets and liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities where there is an intention to settle the balances on a net basis. Pensions and other post-employment benefits The Group operates defined contribution schemes for certain employees in the UK, Ireland, the Netherlands and Denmark and contributes to a state administered money purchase scheme in Poland. The Group pays contributions to publicly or privately administered pension insurance plans and has no further payment obligations once the contributions have been made. The contributions are recognised as an employee benefit expense when they are due. In the Netherlands and Sweden the Group contributes to industry-wide pension schemes for its employees. Although having some defined benefit features, the Group’s liability to these schemes is limited to the fixed contributions which are recognised as an expense when they are due. Accordingly the Group has accounted for these schemes as defined contribution schemes. Share-based payments The Group operates a number of equity settled share-based compensation plans. The fair value of the employee services received in exchange for the grant of options is recognised as an expense with a corresponding adjustment to equity. The total amount to be expensed over the vesting period is determined by reference to the fair value of the options granted, excluding the impact of any non-market vesting conditions. Non-market vesting conditions are included in assumptions about the number of options that are expected to vest. At each balance sheet date, the entity revises its estimates of the number of options that are expected to vest based on non-market vesting conditions. It recognises the impact of the revision to original estimates, if any, in the income statement, with a corresponding adjustment to equity. All adjustments to equity are recognised as a separate component of equity in an employee share scheme reserve. When the options are exercised, the Company issues new shares. The proceeds received net of any directly attributable transaction costs are credited to share capital (nominal value) and share premium. Grants Grants are recognised at their fair value when there is a reasonable assurance that the grant will be received and all attaching conditions have been complied with. Capital grants received and receivable by the Group are credited to deferred income and are amortised to the income statement on a straight line basis over the expected useful economic lives of the assets to which they relate. Revenue grants are recognised as income over the periods necessary to match the grant on a systematic basis to the costs that it is intended to compensate. Dividend distribution Dividend distribution to the Company’s shareholders is recognised as a liability in the consolidated financial statements in the period in which the dividends are approved by the Company’s shareholders. Financial statementsGovernance OverviewStrategic reportHilton Food Group plcAnnual report and financial statements 201370 3 Financial risk management Financial risk factors The Group’s activities expose it to a variety of financial risks: market risk including price risk, foreign exchange risk and cash flow interest rate risk, credit risk and liquidity risk. The Group has in place a risk management programme that seeks to limit the adverse effects on the financial performance of the Group by monitoring the foregoing risks. (a) Market risk (i) Price risk The Group is not exposed to equity securities price risk as it holds no listed or other equity investments. The Group is exposed to commodity price risk which is significantly mitigated through its customer agreements which are on a cost plus or agreed packing rate basis. (ii) Foreign exchange risk The Group is exposed to foreign exchange risk in the normal course of business in its overseas operations, principally on transactions in Euros, Swedish Krona, Danish Krone and Polish Zloty, although such risk is mitigated as natural hedges exist in each operation through matching local currency cash flows. The Group regularly monitors foreign exchange exposure and to date has deemed it not appropriate to hedge its foreign exchange position. (iii) Cash flow interest rate risk The Group’s interest rate risk arises from long term borrowings. Borrowings issued at variable rates expose the Group to cash flow interest rate risk. The Group seeks to manage exposure to interest rate risk through interest rate caps over the majority of its long term borrowings. (iv) Sensitivity analysis Group Annual effect of a change in Group-wide interest rates by 0.5% Annual effect of a change in exchange rates to the GBP £ by 10% Income statement £’000 101  –101  2,233  –1,827  2013 Equity £’000 101  –101  6,092  –4,984  Income statement £’000 126  –126  2,165  –1,788  2012 Equity £’000 126  –126  5,442  –4,469  (b) Credit risk The Group is exposed to credit risk in respect of credit exposures to its retail customer partners and banking arrangements. The Group, whose only customers comprise blue chip international supermarket retailers, has implemented policies that require appropriate credit checks on potential customers before sales are made and in relation to its banking partners. The Group’s maximum exposure to credit risk is £110.9m (2012: £97.1m) as stated in note 17. (c) Liquidity risk The Group monitors regular cash forecasts to ensure that it has sufficient cash to meet operational needs whilst maintaining sufficient headroom on its undrawn committed borrowing facilities and without breaching its banking covenants. The Group held significant cash and cash equivalents of £34.6m (2012: £31.4m) and maintains a mix of long term and short term debt finance. The Group’s financial liabilities measured as the contractual undiscounted cash flows mature as follows: Borrowings £’000 Finance leases £’000 2013 Trade and other payables £’000 Borrowings £’000 Finance leases £’000 2012 Trade and other payables £’000 Less than one year Between one and two years Between two and five years Over five years 11,180  12,685  4,061  –  342  351  1,106  2,244  156,246  –  –  –  12,178  10,966  12,493  –  327  335  1,057  2,191  136,691  –  –  –  Capital risk management The Group’s objectives when managing capital are to safeguard the Group’s ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt. The Group monitors capital on the basis of a gearing ratio. This ratio is calculated as net debt divided by EBITDA. Net debt is calculated as total borrowings (including ‘current and non-current borrowings’ as shown on the consolidated balance sheet) less cash and cash equivalents. EBITDA is calculated as operating profit before significant non-recurring items, interest, tax, depreciation and amortisation. There was no gearing as at the year end (2012: 0.1). Notes to the financial statementscontinuedHilton Food Group plcAnnual report and financial statements 201371 Fair value estimation The carrying value of trade receivables (less impairment provisions) and trade payables are assumed to approximate their fair values. The fair value of financial liabilities for disclosure purposes is estimated by discounting the future contractual cash flows at the current market interest rate that is available to the Group for similar financial instruments. The Directors consider that there is a single level of fair value measurement hierarchy for disclosure purposes. 4 Critical accounting estimates and judgements Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. During 2013 and 2012 there were no critical accounting estimates or judgements in relation to the application of the Group’s accounting policies. 5 Segment information Management have determined the operating segments based on the reports reviewed by the Executive Directors that are used to make strategic decisions. The Executive Directors have considered the business from both a geographic and product perspective. From a geographic perspective, the Executive Directors consider that the Group has seven operating segments: i) United Kingdom; ii) Netherlands; iii) Republic of Ireland; iv) Sweden; v) Denmark; vi) Central Europe including Poland, Czech Republic, Hungary, Slovakia, Latvia, Lithuania and Estonia and vii) Central costs and other including the share of profit from the joint venture in Australia. The United Kingdom, Netherlands, Republic of Ireland, Sweden and Denmark have been aggregated into one reportable segment ‘Western Europe’ as they have similar economic characteristics as identified in IFRS 8. Central Europe and Central costs and other comprise the other reportable segments. An additional reportable segment has been included for 2013 to reflect the change in the reports reviewed by the Executive Directors as a result of the joint venture entered into during the financial year. The 2012 comparatives have been restated accordingly. From a product perspective the Executive Directors consider that the Group has only one identifiable product, wholesaling of meat. The Executive Directors consider that no further segmentation is appropriate, as all of the Group’s operations are subject to similar risks and returns and exhibit similar long term financial performance. The segment information provided to the Executive Directors for the reportable segments is as follows: Total segment revenue Inter–segment revenue Revenue from external customers Operating profit/segment result Finance income Finance costs Income tax expense Profit for the year Western Europe £’000 1,029,131  (414) 1,028,717  27,860  56  (556) (6,133) 21,227  Depreciation and amortisation Additions to non–current assets 14,205  17,898  Central Europe £’000 96,265  (202) 96,063  2,481  57  (29) (497) 2,012  1,287  456  Central costs and other £’000 – – – (4,567) 5  (435) 1,118  (3,879) 2013  Total £’000 1,125,396  (616) 1,124,780  25,774  118  (1,020) (5,512) 19,360  Western Europe £’000 937,405  (1,953) 935,452  27,712  115  (771) (5,987) 21,069  78  146  15,570  18,500  13,160  11,445  Central Europe £’000 95,552  –  95,552  2,318  78  (20) (467) 1,909  1,135  854  Central costs and other £’000 2012  Total £’000 –  1,032,957  –  (1,953) –  1,031,004  25,967  199  (1,454) (5,807) 18,905  (4,063) 6  (663) 647  (4,073) 82  127  14,377  12,426  Segment assets Current income tax assets Deferred income tax assets Total assets Segment liabilities Borrowings Deferred income tax liabilities Total liabilities 223,027  18,495  3,254  166,394  9,556  1,114  244,776  745  1,313  246,834  177,064  14,053  1,459  192,576  197,275  21,023  845  146,605  12,492  595  219,143  699  1,111  220,953  159,692  18,710  1,579  179,981  Financial statementsGovernance OverviewStrategic reportHilton Food Group plcAnnual report and financial statements 201372 5 Segment information (continued) Sales between segments are carried out at arm’s length. Revenue from external customers reported to the Executive Directors is measured in a manner consistent with that in the income statement. The Executive Directors assess the performance of each operating segment based on its operating profit. Operating profit is measured in a manner consistent with that in the income statement. The amounts provided to the Executive Directors with respect to total assets and liabilities are measured in a manner consistent with that of the financial statements. The assets are allocated based on the operations of the segment and their physical location. The liabilities are allocated based on the operations of the segment. The Group interest bearing reorganisation loan is not considered to be a segment liability. The Group has four principal customers (comprising groups of entities known to be under common control), Tesco, Ahold, Coop Danmark and ICA Gruppen. These customers are located in the United Kingdom, Netherlands, Republic of Ireland, Sweden, Denmark and Central Europe including Poland, Czech Republic, Hungary, Slovakia, Latvia, Lithuania and Estonia. Analysis of revenues from external customers and non-current assets are as follows: Analysis by geographical area United Kingdom – country of domicile Netherlands Sweden Republic of Ireland Denmark Central Europe Analysis by principal customer Customer 1 Customer 2 Customer 3 Customer 4 Other Non-current assets excluding deferred tax assets 2013 £’000  15,802  12,532  5,302  5,299  18,560  4,446  61,941  2012 £’000  9,797  11,477  4,374  6,420  20,681  5,270  58,019  Revenues from external customers 2013 £’000  2012 £’000  314,465  294,596  222,802  76,010  120,843  96,064  1,124,780  418,085  338,522  239,331  120,748  8,094  1,124,780  278,945  254,476  211,109  78,976  111,946  95,552  1,031,004  380,290  306,295  227,007  111,245  6,167  1,031,004  6 Auditors’ remuneration Services provided by the Company’s auditor and its associates During the year the Group (including its overseas subsidiaries) obtained the following services from the Company’s auditor and its associates: Group Fees payable to the Company’s auditor for the audit of the parent company and consolidated financial statements Fees payable to the Company’s auditors and its associates for other services: – The audit of the Company’s subsidiaries pursuant to legislation – Other services pursuant to legislation – Services relating to taxation – All other services Total fees payable to the Company’s auditor and its associates Fees payable to other auditors in respect of services provided to subsidiary undertakings 2013 £’000 2012 £’000 128  136  43  66  5  378  60  128  146  43  80  9  406  52  Notes to the financial statementscontinuedHilton Food Group plcAnnual report and financial statements 20137 Expenses by nature Group Changes in inventories of finished goods and goods for resale Raw materials and consumables used Employee benefit expense (note 8) Depreciation and amortisation – owned assets Depreciation and amortisation – leased assets Repairs and maintenance expenditure on property, plant and equipment Trade receivables – impairment Hire of plant and machinery Transportation expenses Operating lease payments Foreign exchange losses Other expenses Total cost of sales, distribution costs and administrative expenses 8 Employee benefit expense Group Staff costs during the year Wages and salaries Social security costs Share options granted to Directors and employees Other pension costs Group Average number of persons employed (including Executive Directors) during the year by activity Production Administration Group Key management compensation (including Directors) Salaries and short term employee benefits Termination payments Post-employment benefits Share-based payments Group Directors’ emoluments Aggregate emoluments including termination payments Company contribution to money purchase pension scheme 73 2013 £’000  (501) 928,789  72,141  15,395  175  11,445  6  717  10,332  8,226  21  52,724  1,099,470  2012 £’000  899  848,848  66,727  14,198  179  12,185  5  667  9,513  7,774  213  43,829  1,005,037  2013 £’000 60,824  8,306  83  2,928  72,141  2013 Number 1,776  467  2,243 2013 £’000  3,282  –  308  58  3,648  2013 £’000 2,127  232  2,359  2012 £’000 56,030  7,647  285  2,765  66,727  2012 Number 1,749  464  2,213 2012 £’000 3,013  282  210  199  3,704  2012 £’000 2,598  143  2,741  Further details of Directors’ emoluments and share interests are given in the Directors’ remuneration report. There are no other employees of the Company other than the Directors. Employee expense of the Company amounted to £nil (2012: £nil). Financial statementsGovernance OverviewStrategic reportHilton Food Group plcAnnual report and financial statements 201374 9 Finance income and costs Group Finance income Interest income on short term bank deposits Interest on income taxes Finance income Finance costs Bank borrowings Finance leases Exchange losses on foreign currency borrowings Other interest expense Finance costs Finance costs – net 10 Income tax expense Group Current income tax Current tax on profits for the year Adjustments to tax in respect of previous years Total current tax Deferred income tax Origination and reversal of temporary differences Adjustments to tax in respect of previous years Total deferred tax Income tax expense 2013 £’000 115  3  118  (671) (208) (63) (78) (1,020) (902) 2013 £’000 5,764  (130) 5,634  (198) 76  (122) 5,512  2012 £’000 198  1  199  (1,035) (207) (97) (115) (1,454) (1,255) 2012 £’000 5,068  (79) 4,989  862  (44) 818  5,807  Deferred tax credited directly to equity during the year in respect of employee share schemes amounted to £218,000 (2012: £152,000 debit). The tax on the Group’s profit before income tax differs from the theoretical amount that would arise using the standard rate of UK Corporation Tax of 23.25% (2012: 24.5%) applied to profits of the consolidated entities as follows: Profit before income tax Tax calculated at the standard rate of UK Corporation Tax 23.25% (2012: 24.5%) Expenses not deductible for tax purposes Adjustments to tax in respect of previous years Profits taxed at rates other than 23.25% (2012: 24.5%) Other Income tax expense There is no tax impact relating to components of other comprehensive income. 2013 £’000 24,872  5,783  88  (54) (207) (98) 5,512  2012 £’000 24,712  6,054  87  (123) (286) 75  5,807  Notes to the financial statementscontinuedHilton Food Group plcAnnual report and financial statements 201375 11 Earnings per share Basic earnings per share are calculated by dividing the profit attributable to owners of the parent by the weighted average number of ordinary shares in issue during the year. Diluted earnings per share are calculated by adjusting the weighted average number of ordinary shares outstanding to assume conversion of all dilutive potential ordinary shares. The Company has share options for which a calculation is done to determine the number of shares that could have been acquired at fair value (determined as the average annual market share price of the Company’s shares) based on the monetary value of the subscription rights attached to outstanding share options. The number of shares calculated as above is compared with the number of shares that would have been issued assuming the exercise of the share options. Group Profit attributable to owners of the parent (£’000) Weighted average number of ordinary shares in issue (thousands) Adjustment for share options (thousands) Adjusted weighted average number of ordinary shares (thousands) Basic and diluted earnings per share (pence) Basic 17,828  71,321  –  71,321  25.0  2013  Diluted 17,828  71,321  654  71,975  24.8  12 Dividends Group Final dividend in respect of 2012 paid 8.6p per ordinary share (2012: 8.0p) Interim dividend in respect of 2013 paid 3.65p per ordinary share (2012: 3.4p) Total dividends paid Basic 17,584  70,538  –  70,538  24.9  2013 £’000 6,139  2,632  8,771  2012  Diluted 17,584  70,538  738  71,276  24.7  2012 £’000 5,635  2,409  8,044  The Directors propose a final dividend of 9.1p per share payable on 27 June 2014 to shareholders who are on the register at 30 May 2014. This dividend totalling £6.6m has not been recognised as a liability in these consolidated financial statements. Financial statementsGovernance OverviewStrategic reportHilton Food Group plcAnnual report and financial statements 201376 13 Property, plant and equipment Group Cost At 2 January 2012 Exchange adjustments Additions Disposals At 30 December 2012 Accumulated depreciation At 2 January 2012 Exchange adjustments Charge for the year Disposals At 30 December 2012 Net book amount At 2 January 2012 At 30 December 2012 Cost At 31 December 2012 Exchange adjustments Additions Disposals At 29 December 2013 Accumulated depreciation At 31 December 2012 Exchange adjustments Charge for the year Disposals At 29 December 2013 Net book amount At 29 December 2013 Land and buildings (including leasehold improvements) £’000 Plant and machinery £’000 Fixtures and fittings £’000 Motor vehicles £’000 24,737  (281) 449  – 24,905  12,650  (290) 1,905  – 14,265  12,087  10,640  24,905  256  1,003  (2) 26,162  14,265  107  1,957  (1) 16,328  128,311  (940) 10,887  (451) 137,807  83,738  (256) 11,355  (155) 94,682  44,573  43,125  137,807  979  15,017  (718) 153,085  94,682  412  12,093  (620) 106,567  9,834  46,518  11,063  81  679  (1,164) 10,659  8,717  145  712  (1,164) 8,410  2,346  2,249  10,659  24  1,066  (598) 11,151  8,410  6  986  (597) 8,805  2,346  351  3  116  (192) 278  178  2  69  (119) 130  173  148  278  –  142  (109) 311  130  –  65  (62) 133  178  Total £’000 164,462  (1,137) 12,131  (1,807) 173,649  105,283  (399) 14,041  (1,438) 117,487  59,179  56,162  173,649  1,259  17,228  (1,427) 190,709  117,487  525  15,101  (1,280) 131,833  58,876  Land and buildings are held under short leaseholds. Details of bank borrowings secured on assets of the Group are given in note 19. Depreciation charges are included within administrative expenses in the income statement. The cost and net book amount of property plant and equipment in the course of its construction included above comprise plant and machinery £5,027,000 (2012: £668,000). Property, plant and equipment include the following amounts where the Group is a lessee under a finance lease: Cost – capitalised finance leases Accumulated depreciation Net book amount 2013 £’000 3,412  (1,688) 1,724  2012 £’000 3,357  (1,492) 1,865  Included in assets held under finance leases are land and buildings with a net book amount of £1,724,000 (2012: £1,858,000) and plant and machinery with a net book amount of £nil (2012: £7,000). Notes to the financial statementscontinuedHilton Food Group plcAnnual report and financial statements 201314 Intangible assets Group Cost At 2 January 2012 Exchange adjustments Additions At 30 December 2012 Accumulated amortisation At 2 January 2012 Exchange adjustments Charge for the year At 30 December 2012 Net book amount At 2 January 2012 At 30 December 2012 Cost At 31 December 2012 Exchange adjustments Additions At 29 December 2013 Accumulated amortisation At 31 December 2012 Exchange adjustments Charge for the year At 29 December 2013 Net book amount At 29 December 2013 77 Total £’000 12,528  (111) 295  12,712  10,621  (102) 336  10,855  1,907  1,857  12,712  126  1,272  14,110  10,855  126  469  11,450  Product licences £’000 Computer software £’000 Goodwill £’000 7,703  (189) 35  7,549  7,665  (189) 12  7,488  38  61  7,549  138  1,146  8,833  7,488  156  145  7,789  1,044  3,989  78  260  4,327  2,956  87  324  3,367  1,033  960  4,327  (12) 126  4,441  3,367  (30) 324  3,661  780  836  –  –  836  –  –  –  –  836  836  836  –  –  836  –  –  –  –  Amortisation charges are included within administrative expenses in the income statement. 836  2,660  Financial statementsGovernance OverviewStrategic reportHilton Food Group plcAnnual report and financial statements 201378 Notes to the financial statements continued 15 Group entities Investments in subsidiaries Investments in subsidiary undertakings are recorded at cost, which is the fair value of consideration paid. Company At 30 December 2012 and 29 December 2013 The subsidiary undertakings of the Group are: Subsidiary undertakings Hilton Meats (Retail) Limited Hilton Meats Zaandam BV Hilton Foods (Ireland) Limited HFG Sverige AB Hilton Foods Danmark A/S Hilton Foods Ltd Sp zoo Hilton Foods Limited Hilton Meats Holland Limited Hilton Food Group (Europe) Limited Hilton Foods Asia Pacific Limited Hilton Food.com Limited Country of incorporation or registration Northern Ireland Netherlands Republic of Ireland Sweden Denmark Poland Northern Ireland Northern Ireland Northern Ireland Northern Ireland Northern Ireland Nature of business Specialist meat packing Specialist meat packing Specialist meat packing Specialist meat packing Specialist meat packing Specialist meat packing Holding company Holding company Holding company Holding company Dormant 2013 £’000  102,985  2012 £’000  102,985  (%) Proportion of ordinary shares held by Parent –  –  –  –  –  –  100  –  –  –  –  Group 100  80  100  100  100  100  –  80  100  100  100  All subsidiary undertakings are included in the consolidation. The Company’s voting rights in its subsidiary undertakings are the same as its effective interest in its subsidiary undertakings. Investments in joint ventures The Group uses the equity method of accounting for its interest in joint ventures. The aggregate movement in the Group’s investments in joint ventures is as follows: Group Profit for the period Effect of movements in foreign exchange At 29 December 2013 2013 £’000 464  (59) 405  2012 £’000 –  –  –  Where relevant, management accounts for the joint venture have been used to include the results up to 29 December 2013. The Group’s share of the assets, liabilities, income and expenses of the joint venture are detailed below: Current assets Current liabilities Net assets Income Expenses Taxation Profit after tax The joint venture of the Group is: Joint venture Woolworths Meat Co. Pty Ltd Country of incorporation or registration Australia Nature of business Specialist meat packing 2013 £’000  638  (233) 405  664  (2) (198) 464  2012 £’000  –  –  –  –  –  – –  (%) Proportion of ordinary shares held by Parent –  Group 50  Hilton Food Group plcAnnual report and financial statements 201316 Inventories Group Raw materials and consumables Finished goods and goods for resale 79 2013 £’000 19,247  4,590  23,837  2012 £’000 17,796  4,089  21,885  The cost of inventories recognised as an expense and included in cost of sales amounted to £928,288,000 (2012: £849,747,000). The Group charged £563,000 in respect of inventory write-downs (2012: £150,000). The amount charged has been included in cost of sales in the income statement. 17 Trade and other receivables Trade receivables Less: provision for impairment of trade receivables Trade receivables – net Amounts owed by Group undertakings Amounts owed by related parties (see note 26) Other receivables Prepayments 2013 £’000  110,944  (48) 110,896  –  387  8,064  5,009  124,356  The carrying amount of trade and other receivables is denominated in the following currencies: Currency UK Pound Euro Swedish Krona Danish Krone Polish Zloty Australian Dollar 2013 £’000 23,511  57,056  22,572  15,978  4,852  387  124,356  Group 2012 £’000  97,190  (51) 97,139  –  326  5,146  5,200  107,811  Group 2012 £’000 22,413  43,883  21,616  13,830  6,069  – 107,811  2013 £’000  –  –  –  88  –  –  –  88  2013 £’000 88  –  –  –  –  88  Company 2012 £’000  –  –  –  115  –  –  –  115  Company 2012 £’000 115  –  –  –  –  115  The fair values of trade and other receivables are the same as their carrying value. The maximum exposure to credit risk is the fair value of each class of receivable mentioned above. Trade receivables impaired and the amount of the impairment provision was £48,000 (2012: £51,000). The individually impaired receivables mainly relate to invoices which are in dispute. It was assessed that a portion of the receivables is expected to be recovered. The trade receivables that were impaired were all overdue by more than six months. There were no other trade receivables which were overdue. The other classes within trade and other receivables do not contain impaired assets. The trade receivables which are not impaired or overdue are all less than 30 days old. Movements on the provision for impairment of trade receivables are as follows: Group At 30 December 2012 Provision for receivables impairment Receivables written off during the year as uncollectable Exchange differences At 29 December 2013 2013 £’000 51  132  (136) 1  48  2012 £’000 46  147  (141) (1) 51  Financial statementsGovernance OverviewStrategic reportHilton Food Group plcAnnual report and financial statements 201380 Notes to the financial statements continued 18 Cash and cash equivalents Cash at bank and on hand 19 Borrowings Group Current Bank borrowings Finance lease liabilities Non-current Bank borrowings Finance lease liabilities Total borrowings 2013 £’000 34,642  Group 2012 £’000 31,428  2013 £’000 189  2013 £’000 10,942  162  11,104  16,031  2,585  18,616  29,720  Company 2012 £’000 30  2012 £’000 11,369  128  11,497  22,456  2,677  25,133  36,630  Due to the frequent re-pricing dates of the Group’s loans, the fair value of current and non-current borrowings is approximate to their carrying amount. The carrying amounts of the Group’s borrowings are denominated in the following currencies: Currency UK Pound Euro 2013 £’000 17,375  12,345  29,720  2012 £’000 18,711  17,919  36,630  Under the new facility signed after the year end borrowings are repayable in quarterly instalments by 2014 – 2018. Interest has reduced from LIBOR or EURIBOR plus 1.75% to 1.60% subject to interest rate caps over £17m of borrowings where LIBOR is capped at 4.5%. Bank borrowings totalling £26,973,000 (2012: £33,825,000) are secured by fixed and floating charges over the assets of the individual Group borrowers and through joint and several guarantees from each active Group undertaking. The Group has undrawn overdraft borrowing facilities of £18.3m (2012: £18.2m) which expire after one year. The undiscounted contractual maturity profile of the Group’s borrowings is described in note 3. The minimum lease payments and present value of finance lease liabilities is as follows: Group No later than one year Later than one year and no later than five years Later than five years Future finance charges on finance leases Present value of finance lease liabilities Minimum lease payments Present value 2013 £’000 358  1,457  2,237  4,052  (1,305) 2,747  2012 £’000 328  1,393  2,562  4,283  (1,478) 2,805  2013 £’000 162  2,585  –  2,747  –  2,747  2012 £’000 128  2,677  –  2,805  –  2,805  Lease liabilities are effectively secured as the rights to the leased asset revert to the lessor in the event of default. The fair value of the Group’s finance lease liabilities is £3,840,000 (2012: £4,028,000). The fair values are based on cash flows discounted using the European Central Bank benchmark main refinancing operations fixed interest rate of 0.25% (2012: 0.75%). Hilton Food Group plcAnnual report and financial statements 201381 20 Trade and other payables Trade payables Amounts owed to Group undertakings Amounts owed to related parties (see note 26) Social security and other taxes Accruals and deferred income 2013 £’000 138,527  –  –  5,151  17,719  161,397  Group 2012 £’000 120,393  –  6  5,081  16,292  141,772  2013 £’000 –  7,225  –  –  48  7,273  Company 2012 £’000 –  11,399  –  –  2  11,401  The fair value of trade and other payables are the same as their carrying value. 21 Deferred income tax Group At 2 January 2012 Exchange differences Income statement credit/(charge) Adjustment in respect of employee share schemes At 30 December 2012 Exchange differences Income statement credit Adjustment in respect of employee share schemes At 29 December 2013 Accelerated capital allowances £’000 609  21  161  –  791  (131) 113  –  773  Other timing differences £’000 525  –  (53) (152) 320  –  2  218  540  Deferred income tax assets total £’000 1,134  21  108  (152) 1,111  (131) 115  218  1,313  Deferred income tax liabilities: Accelerated capital allowances £’000 (641) (12) (926) –  (1,579) 113  7  –  (1,459) Other timing differences principally relate to share based payments. The deferred income tax liability above includes £200,000 (2012: £400,000) which is estimated to reverse within 12 months. The deferred income tax asset above is not expected to reverse within 12 months. 22 Ordinary shares Issued and fully paid ordinary shares of 10p each At 30 December 2012 Issue of new shares relating to employee incentive schemes At 29 December 2013 Number of shares (thousands) 70,866  1,291  72,157  2013 £’000 7,087  129  7,216  Group 2012 £’000 6,985  102  7,087  2013 £’000 7,087  129  7,216  Company 2012 £’000 6,985  102  7,087  All ordinary shares of 10p each have equal rights in respect of voting, receipt of dividends and repayment of capital. Financial statementsGovernance OverviewStrategic reportHilton Food Group plcAnnual report and financial statements 201382 Notes to the financial statements continued 23 Share-based payment Executive share option scheme Under the Group’s executive share option scheme share options are granted to Executive Directors and to selected senior employees. The exercise price of the granted options is equal to the market price of the shares on the date of the grant. The options are exercisable starting three years from the grant date subject to the Group achieving its target growth in earnings per share over the period plus 3%. The options have a contractual option term of 10 years. The Group has no legal or constructive obligation to repurchase or settle the options in cash. All employee sharesave scheme This scheme is open to all eligible employees of the Group (including the Executive Directors) who make regular savings over a three year period. The exercise price of the granted options is equal to the market price of the shares on the date of the grant. The options are exercisable starting three years from the grant date and must be exercised within six months thereafter. No performance conditions are attached to the options granted under the scheme. Long Term Incentive Plan (LTIP) Under the Group’s Long Term Incentive Plan nil cost share options are granted to Executive Directors and to selected senior employees. The options are exercisable starting three years from the grant date subject to the Group achieving a minimum earnings per share compound growth target. Awards will vest on a sliding scale with 25% of the maximum award applied at the minimum EPS growth target of 5%–6% per year with the full award vesting where EPS growth is at least 10%–14.5% per year. The options have a contractual option term of 10 years. The Group has no legal or constructive obligation to repurchase or settle the options in cash. Movements in the number of share options outstanding and their related exercise prices are as follows: At 2 January 2012 Granted Exercised Forfeited At 30 December 2012 Granted Exercised Forfeited At 29 December 2013 Executive share option Options (’000) 3,460  –  (640) (46) 2,774  –  (1,169) (4) 1,601  Exercise price (pence) 203.47  –  191.54  234.55  205.70  –  198.95  246.00  210.54  Options (’000) 665  –  (377) (110) 178  –  (122) (56) –  Sharesave Exercise price (pence) 173.57  –  147.00  147.00  246.00  –  246.00  246.00  – Share options outstanding at the end of the year have the following expiry date and exercise prices: Expiry date December 2013 May 2018 May 2019 May 2020 June 2022 May 2023 Type of scheme Sharesave Executive share option Executive share option Executive share option Long Term Incentive Plan Not exercisable Long Term Incentive Plan Not exercisable Status Exercisable Exercisable Exercisable Exercisable Exercise price (pence) 246.00  199.50  174.75  246.00  nil cost nil cost Long Term Incentive Exercise price (pence) –  –  –  –  –  –  –  –  –  Number options 2012 (‘000) 178  762  1,072  940  1,147  – Options (’000) –  1,147  –  –  1,147  759  –  –  1,906  2013 (‘000) –  385  546  670  1,147  759  The fair value of options granted during 2013 determined using the Black-Scholes valuation model was 303p per option. The significant inputs into the model were the exercise price shown above, volatility of 31% based on a comparison of similar listed companies, dividend yield of 4%, an expected option life of four years, and an annual risk-free interest rate of 1.69%. See note 8 for the total expense recognised in the income statement for share options granted to Directors and employees. Hilton Food Group plcAnnual report and financial statements 201324 Cash generated from operations Group Profit before income tax Finance costs – net Operating profit Adjustments for non-cash items: Share of post tax profits of joint venture Depreciation Amortisation of intangible assets Loss on disposal of non-current assets Adjustment in respect of employee share schemes Changes in working capital: Inventories Trade and other receivables Prepaid expenses Trade and other payables Accrued expenses Cash generated from operations The parent company has no operating cash flows. 83 2013 £’000 24,872  902  25,774  (464) 15,101  469  –  83  (1,835) (15,983) 191  17,025  1,427  41,788  2012 £’000 24,712  1,255  25,967  – 14,041  336  39  285  549  (3,653) (718) 2,650  1,186  40,682  25 Commitments (a) Capital commitments Capital expenditure contracted for at the balance sheet date but not yet incurred is as follows: Property, plant and equipment 2013 £’000 19,766  Group 2012 £’000 451  2013 £’000 – Company 2012 £’000 –  (b) Operating lease commitments The Group leases various properties under non-cancellable operating lease arrangements. The future aggregate minimum lease payments under non-cancellable operating leases are as follows: Group No later than one year Later than one year and no later than five years Later than five years expiring 2018 to 2023 Land and buildings Plant and equipment 2013 £’000 6,358  17,855  21,616  45,829  2012 £’000 7,189  15,641  5,925  28,755  2013 £’000 687  1,359  17  2,063  2012 £’000 883  1,792  23  2,698  Financial statementsGovernance OverviewStrategic reportHilton Food Group plcAnnual report and financial statements 2013Hilton Food Group plc Annual report and financial statements 2013 84 Notes to the financial statements continued 26 Related party transactions and ultimate controlling party The Directors do not consider there to be one ultimate controlling party. The companies noted below are all deemed to be related parties by way of common Directors. Sales and purchases made on an arm’s length basis on normal credit terms to related parties during the year were as follows: Group Hilton Meats (International) Limited 2013 £’000  –  Sales 2012 £’000  1,673  2013 £’000  –  Purchases 2012 £’000  61,724  During the year joint venture costs totalling £1,794,000 (2012: £nil) were recharged to Woolworths Meat Co. Pty Ltd. Amounts owing from and to related parties at the year end were as follows: Owed from related parties Owed to related parties Group Hilton Meats (International) Limited Woolworths Meat Co. Pty Ltd 2013 £’000 –  387  387  2012 £’000 326  –  326  The Company’s related party transactions with other Group companies during the year were as follows: Company Hilton Foods Limited – dividend received Hilton Foods Limited – interest expense Hilton Meats (Retail) Limited – payment for group relief 2013 £’000 –  –  –  2013 £’000 9,750  229  88  2012 £’000 6  –  6  2012 £’000 9,500  356  115  At the year-end £7,225,000 (2012: £11,399,000) was owed to Hilton Foods Limited and £88,000 (2012: £115,000) was owed by Hilton Meats (Retail) Limited. Details of key management compensation are given in note 8. 27 Financial instruments by category The accounting policies for financial instruments have been applied to the line items below: Group Assets as per balance sheet Trade and other receivables Cash and cash equivalents Group Liabilities as per balance sheet Trade and other payables Borrowings Loans and receivables 2013 £’000 119,347  34,642  153,989  2012 £’000 102,611  31,428  134,039  Other financial liabilities at amortised cost 2013 £’000 156,246  29,720  185,966  2012 £’000 136,691  36,630  173,321  In addition to the above, amounts owed to the Company by Group undertakings of £88,000 (2012: £115,000) are classified as ‘loans and receivables’ and amounts owed by the Company to Group undertakings of £7,225,000 (2012: £11,399,000) are classified as ‘other financial liabilities at amortised cost’. 85 Registered office and advisors Registered office 2–8 The Interchange Latham Road Huntingdon Cambridgeshire PE29 6YE Advisors Corporate brokers Panmure Gordon (UK) Limited One New Change London EC4M 9AF Numis Securities Limited The London Stock Exchange Building 10 Paternoster Square London EC4M 7LT Legal advisor Taylor Wessing LLP 5 New Street Square London EC4A 3TW Independent auditors PricewaterhouseCoopers LLP Statutory Auditors and Chartered Accountants Waterfront Plaza 8 Laganbank Road Belfast BT1 3LR Registrar Equiniti Limited Aspect House Spencer Road Lancing West Sussex BN99 6DA Financial Public Relations Citigate Dewe Rogerson Limited 3 London Wall Buildings London EC2M 5SY Bankers Ulster Bank Limited Donegall Square East Belfast BT1 5UB H i l t o n F o o d G r o u p p l c A n n u a l r e p o r t a n d fi n a n c i a l s t a t e m e n t s 2 0 1 3 Hilton Food Group plc 2–8 The Interchange Latham Road Huntingdon Cambridgeshire PE29 6YE www.hiltonfoodgroupplc.com 

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